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Eric Bloch Column

Inflation runs berserk

By Eric Bloch

INFLATION in Zimbabwe has never been so great as it is at present. Based upon the Consumer Price Index (CPI), it soared to an all–time high of 1 204,3%, yea

r-on year, in August, which is higher than anywhere else in the world. As frighteningly abysmal as that is, even more fearful is that it appears inevitable that, for the immediate future, inflation is going to continue to spiral upwards, unless some very drastic and dynamic actions to hold the inflation surge are taken by government and by all sectors of society. In fact, a recently issued report of the International Monetary Fund (IMF) foreshadows that Zimbabwe’s inflation in 2007 will reach 4 279%.

The intense upward movement in inflation in August was concurrent with the redenomination of Zimbabwe currency, the Reserve Bank of Zimbabwe having slashed three zeros from all the country’s currency. Unavoidably, many had thought, albeit erroneously, that the primary motivation for the restructuring of the currency had been in order to contain inflation.

When, instead of inflation declining, it rocketed upwards, there was widespread criticism of the currency redenomination, with the majority of the populace being oblivious to the RBZ statements that the exercise had been driven, wholly and solely, in order to restore effective currency management and security and was completely unrelated to other economic objectives.

It had been undertaken in order to restore transaction efficiency, reinstate the ability of computers, cash registers, calculators, petrol pump meters, and the like, to function effectively, whilst simultaneously virtually eliminating dependency upon mechanical note counters, and markedly reducing security risks of those necessarily handling large volumes of cash.

Not recognising that these were the motivations and intents of the introduction of the redenominated currency, and being aware that RBZ has been taking a major role in endeavours to halt and reverse inflation, the greater part of the population unilaterally assumed the exercise to be one of inflation-targeting and the sudden, exponential rise in inflation fuelled vitriolic attacks upon RBZ for an allegedly failed endeavour.
Concurrently, there was widespread allegation by the masses that retailers had exploited the opportunity of the change of currency to “conceal” yet further price increases, by resorting to upward rounding-off of prices, and that had also contributed substantially to the cataclysmic rise in inflation. Undoubtedly some retailers will have done so, but all indications are that they were relatively few. Some recognised that doing so would render their products uncompetitive, whilst most were fearful of excessive governmental responses and actions if they did so.

The realities were diverse other very major causes of inflation. First and foremost will have been the intensifying scarcity of foreign exchange, having two very severe inflationary repercussions. The first has been, and is, that all are dependent upon imports for their production, be they raw materials, consumables, spares, plant and machinery, or otherwise have been unable to access the foreign currency necessary for continuing inflows of their needs. The result has been that productivity has plummeted downwards. At the same time, as a result of inflation, fixed costs continue to soar upwards. In order to survive, the producers have had little or no choice but to increase prices on what little they do produce in order to recover those fixed costs (fixed not as to price, but as to having to be incurred, irrespective of whether or not production is attained, such as — for example — salaries, rents, insurance, and so forth).

The second consequence has been that an ever increasing demand for foreign currency has developed within the parallel and black markets, as producers strive desperately to obtain critically needed currencies to fund imports and other foreign-exchange based costs. The demand in those alternative markets has also been fuelled by a massively increased endeavour by some in the populace to externalise resources, in order to halt the inflation-driven erosion of value. The demand has accelerated in part in reaction to the continuing rise in inflation, and in part due to the inability to invest funds in the money market at rates realistically aligned to inflation.

As foreign exchange demands in the alternative markets rose and rose, far in excess of availability, the rates of exchange ineviblity moved, causing increases to the producer’s input costs, and thereby necessitating yet further price increases. A prime example, of a myriad that can be cited, is the trend in prices of fuel. In July the black market average rate for a litre of petroleum was approximately $450, whilst in August the average was in excess of $600, and a week ago prices were as high as $1 030! Fuel costs impact upon every part of the economy, and therefore their increases are major stimulants of inflation. The same applies to much else that has been subject to the gargantuan rise in parallel market rates.

Yet another key contributant to the overwhelming surge in inflation has been, and continues to be, inflation itself. Almost all wage negotiations include, as fundamental element of wage demands, that wages increase by at least the extent of inflation (irrespective of whether or not the employer is able to fund the increases). Most commercial, industrial and residential rentals are closely linked to inflation. And most businesses, in pricing their goods and services, do so having regard not to the original costs of the goods, and to the operational expenses of the enterprise, but also to the anticipated replacement cost of the goods. Thus, inflation is a very great fuellant of further inflation.

A further escalating element of inflation is corruption. The immensity of the hardships faced by the majority of Zimbabweans is so great that ever more are resorting to corrupt practices in order to supplement their meager incomes. Corruption has become pronouncedly endemic in both the public and private sectors. Within the public sector, that exacerbates the fiscal deficit, intensifying the state recourse to printing of money. Although, on occasion, the ends justify the means, the printing of money is necessary, and not always highly inflationary, more often than not such printing has disasters inflationary consequences. Within the private sector, the corruption increases yet further the operating costs of the business, thereby necessarily repercussing upon pricing, and hence further stimulating inflation.

All these, and other factors, are resulting in inflation going berserk. Even worse is that its rapidly escalating upward trend will continue apace, unless very positive measures are now persued extremely resolutely. First and foremost, government and the RBZ must very expeditiously move official exchange rates to realistic levels which accord viability to exporters, thereby enabling substantive export-generated foreign exchange inflows.

Admittedly the Zimbabwe dollar was depreciated from $100: US$1 to $250: US$1 on August 1, but not only was that not wholly insufficient devaluation, it has been negated by subsequent inflation. Merely on the strength of August inflation, the rate should have moved to at least $325: US$1 and, allowing for September inflation, it should probably now be in excess of $400:US$1. In addition, exports must have creditable assurance of continuing exchange rate adjustment commensurate with ongoing inflation. Concurrently, interest rates must rise to inflation related, real rates.

At the same time, there must be a cessation of talk of attracting investment, and instead a genuinely investment conducive environment created. Not only must Zimbabwe drive towards rapid re-establishment of democracy, justice, law and order, respect for human rights, and economic deregulation but it must also cease its endless declarations and actions of asset appropriation, be they of land, mines, industries or otherwise. Instead, constructive, internationally and nationally equitable economic empowerment incentivisation and facilitation measures are needed.

And, at the same time Zimbabwe must urgently restore its relationships with the international community in general, and the first world states and international monetary bodies in particular. Zimbabwe’s “Look East” policy needs to become a “Look Far and Wide” policy, encompassing North, South, East and West! Then Zimbabwe may enjoy meaningful foreign exchange inflows.

Zimbabwe also needs to cease it’s endless talk of containing corruption, and must finally do so. And of especially great importance, the long overdue social contract between government, private enterprise and labour must finally be concluded, with utmost urgency and near total unconditionality, in order to limit the ongoing creation of inflation by inflation. Failing all these actions, inflation will continue to run berserk, at an ever greater pace, the economy will reach almost total collapse, and poverty and misery will be more and more universal amongst the Zimbabwean population.

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