Dumisani Muleya/Shakeman Mugari
ZIMBABWE’S soaring inflation rate is expected to reach 400% by the end of this month, economic analysts said this week. And it is likely to be fuelled by the recent decision t
o print more money.
They said the official figure of 300,1% was unrealistic because the Central Statistical Office (CSO), which calculates inflation, was using variables that did not reflect the situation on the ground.
Analyst Eric Bloc said his calculation showed that inflation was currently 320% but forecast it would reach 400% by month-end.
“Official inflation is always 20% less than the real inflation rate because the CSO uses spending patterns of the past and controlled prices of goods whereas most basic commodities are pegged on black market rates,” Bloch said.
“It is inevitable that inflation will continue to rise unabated while the government fools itself by using outdated measurements to suppress the inflation numbers.”
Analysts said the current inflation rate did not reflect reality because it ignored the sprawling black market. They said it overlooked the fact that the economy was virtually operating in the underworld where prices were almost double the controlled ones.
The International Monetary Fund (IMF) last October forecast that Zimbabwe’s inflation would soar to 522,2% this year. At the time inflation was 139,9% but has since risen in leaps and bounds.
A German economic expert who visited the country last year to assess the economic situation on behalf of the Bundesagentur fur Aussenwirschaft, a business forum that deals with imports and exports, also estimated that inflation this year would shoot above 500%.
Inflation has become a major problem in Zimbabwe. It is reversing the economic gains of the past 22 years and, by gnawing at the fabric of society, fuelling social instability.
Recent studies show at least 60% of Zimbabwe’s population now lives below the poverty datum line due to inflation. The worst-affected people are the unemployed and those on low and fixed incomes such as pensioners.
Even middle-class income earners, who constitute a significant component of aggregate demand, are struggling to survive.
Inflation is eroding real incomes, investment, business confidence, output, and employment.
It is also eating away at national savings. It is arguably the biggest single threat facing Zimbabwe today.
In a normal economy, domestic savings are supposed to be at least 25% of the GDP but in Zimbabwe savings have fallen to less that 9% due to fiscal deficits, declining economic activity and inflation.
The destruction of national savings has led to a reduction in domestic investment and economic development. In addition to inflation, low interest rates have wiped out savings. The spread between real interest rates and inflation continues to widen, thus discouraging savings.
Increased demand for credit and parallel market activities fuelled by the availability of cheap money have intensified the problem. This has been compounded by a pattern of reckless government borrowing and spending.
Low interest rates, coupled with increasing money supply, have created inflationary asset-price bubbles and artificial property market values, especially in housing.
Stock and property asset market prices keep rising as people avoid low interest rates on the money market and hedge their fluid assets by converting them into real estate.
This means government’s policy of trying to stimulate production and exports through low interest rates will not work as the source of domestic capital – savings – that create investment has effectively been eroded.
Finance minister Herbert Mure-rwa admitted in his budget presentation last year that inflation had become the single most challenging problem for Zimbabwe.
“Inflation has become an interactive process – self-perpetuating and generating a perilous momentum of its own,” Murerwa said.
“When economic agents expect inflation to persist, implicit indexation and discretionary pricing become inevitable. This leads to more inflation as adaptive expectations force past inflation trends to influence current and future, as is the case now.”
Government has over the years sustained huge budget deficits that it finances through borrowing from the Reserve Bank. This expenditure of money on consumption rather than on productive sectors has sabotaged investment.
With its gargantuan appetite to borrow and spend on non-productive areas, government has also crowded out the private sector from the money market and thus undermined private investment.
The current massive printing of money, which will result in the injection of $24 billion into the economy by next month, will also intensify inflation.
Kingdom Financial analyst Witness Chinyama said increasing money supply without a corresponding increase in economic output was highly inflationary.
“In fact, Zimbabwe is currently experiencing stagflation – a combination of declining economic activity and very high levels of inflation,” he said.
The dramatic rise in inflation to three digits has been accompanied by similar growth rates in money supply. At the moment money supply growth is 160% and this is highly inflationary.