Eric Bloch Column

You were right, Gono!

WHEN the then newly appointed governor of the Reserve Bank, Gideon Gono, presented his first Monetary Policy statement last December, he foreshadowed that the year-on-year inflation rate would decline to 200% or below by December. Most economis

ts, analysts and businessmen received his projection with great scepticism and cynicism.

Inflation had been burgeoning at an ever greater pace since 2001. At that time the populace was already wilting, for inflation (based upon the Consumer Price Index) rose to a then inconceivable level of 71,9% at a time when first world countries had inflation within the range of 2-4%, and virtually all countries within the African sub-continent had inflation levels well below 20%, and many below 10%.

But despite having reached what were perceived to be the unattainable pinnacles of inflation, the rate continued to surge upwards, reaching 133,2% in 2002 and a horrendous 619,5% by November 2003.And, with inflation having uncontrollably soared upwards, despite recurrent pronounced assurances emanating from government that the necessary measures were being pursued to bring the rampant inflation down sharply, and none of those assurances materialising, it was inevitable that most received Gono’s prognostications as being devoid of realism and as empty of substance as had been all the unfulfilled promises of government that inflation would fall.

That the whole Zimbabwean population, with very rare exception, could not give any credence to Gono’s prophecies and targets was very understandable. Almost all were suffering severely from the hyperinflation which had set in and was believed to be endemic to the economy. A consumer’s average spending basket in 1995 of $100 had a cost increase to $190,10 in 1999, rising to $469,60 in 2000, to $1 883,10 in 2002 and, by 2003, that which cost $100 in 1995 cost an unbelievable $8 757,10. To quote from a publication of the National Economic Consultative Forum (NECF): “If a domestic worker earned an annual income of $12 000 in 1995, for the same standard of living the same domestic worker by 2003 needed an annual income of $1 032 000, or 86 times more than his/her income of 1995.”

And, if only the most essential components of an average consumer’s spending basket were assessed, the inflation impacts were, in most instances, even greater. At least $645,95 was required in December, 2003 to buy the same food as could be purchased for $100 in December, 2002. Accommodation costs (by way of rent, rates, fuel and power) as amounted to $100 in December 2002 amounted to $455,11 a year later whilst, in the same period $100 of medical expenses equated to $669,06 in December, 2003. Even more stunning and frightening for consumers was that $100 of transport and communication costs in December, 2002 rose to $1 210,55 by December 2003.

The scepticism was reinforced by awareness that the many causes of Zimbabwean inflation included continuing profligacy of government, with its never-ending spending far beyond its means and consequential immense recourse to borrowings, many of which emanated from the Reserve Bank which resorted to the inflation creative excessive printing of money. How on earth was the Reserve Bank governor going to curb the government spending excesses? A further very great contributing factor to inflation was the gargantuan levels of corruption that pervaded all sectors of government and the private sector, and there were no indications that government was genuinely motivated to do anything to curb corruption, albeit that it had talked of doing so for many years.

Inflation was also fuelled by the massive depreciation of the Zimbabwean dollar — not at official rates of exchange, which were virtually static, but within the parallel and black markets, which were extremely active and virtually the only source of foreign exchange to fund imports. Commodity shortages were similarly triggers for ever greater inflation, for many essentials such as petroleum products were only available from unofficial markets at enormous premiums.

In such an environment, hardly any could imagine that the “new broom” governor could possibly achieve an almost miraculous decrease in inflation to an extent of two-thirds rate reduction within one year. This columnist was one of the vast majority who, whilst admiring the governor’s aspirations, believed they were unrealistic in the extreme. I believed that he was succumbing to wishful thinking which could not be transformed into reality. But now, nine months later, the signs are very clear that all the sceptics, myself included, were totally wrong in our disbelief and doubts. Although the governor’s target has not yet beenreached, it is becoming increasingly apparent that the prospects of his forecast proving correct are now very great and that, in fact, the target may well be surpassed. Gono has, so far, proven that he was potentially right in his inflation prognostications.

In the first full calendar month after the governor’s initial Monetary Policy statement, year-on-year inflation rose to 622,8%, being an all-time record high. But since then it has fallen in each and every month.

The achievement is remarkable and widely commended, including very positive comments from as authoritative a body as the International Monetary Fund. The astounding reduction in the rate of inflation is attributable to various factors, one of which is purely technical. The rate is calculated according to the movement in the CPI, by comparing the index for a prescribed period against the base of the prior period. Thus, the August, 2004 inflation rate is determined according to the extent that the CPI at August, 2004 exceeds that at August, 2003 in the case of year-on-year inflation, and exceeds that of July, 2004 in the case of month-on-month inflation. As the CPI had been rising at an intensely accelerating rate, the base upon which the rate is determined has been rising. Thus, measurement has progressively been against a higher base, resulting in a falling rate.

However, the lowering of inflation cannot only be ascribed to atechnicality. A very major factor has been that not only has the foreign currency exchange rate been almost static for some time, minimising escalations in import costs, but in addition most imports in 2001 to 2003 were funded with foreign exchange sourced within the parallel and black markets. By December 2003 the rates in those markets were in the region of US$1:$7 600, whereas the rate at which, until recently, imports were mainly funded was that determined in the foreign currency auctions of the Reserve Bank, which recently, were only marginally above US$1:$5 600.

As a result, in many instances, the cost of imports has, in Zimbabwean dollar terms, fallen, and this has contributed significantly to the decline in the inflation rate.

Almost immediately after taking office the governor has promoted a theme tune that “there is no gain without pain”, he trying to prepare the populace as a whole, and the business sector in particular, for negative and adverse side effects of some of the monetary policies.

Regrettably, the greatest sufferers of that pain have been Zimbabwe’s exporters and, as a result their employees, suppliers, shareholders and other stakeholders. With continuing inflation, although at a substantially lesser rate than previously, exporters have been faced with continually increasing operating costs.