One of us could be getting it wrong

By Admire Mavolwane

THERE is a somewhat controversial law in classical economics, ascribed to a French economist by the name J B Say which, in simple terms, can be interpreted as stating that “supply c

reates its own demand”.


Without labouring on the details of the argument, the theory normally referred to as the “Law of Markets” postulates that if goods are being produced and supplied to the market then sufficient purchasing power is thereby generated for someone to buy them. For the same manner, the theory can be extended to include the supply of money.


From the statistics available from the Reserve Bank of Zimbabwe through their Weekly Economic Highlights publication, it appears as if by December 2004 the quantum of total notes and coins in circulation grew by 251% year-on-year (our own calculations). In essence, the figure actually refers to only notes in circulation as there aren’t any coins in use at the moment and is supposed to represent the primary demand for money, usually for transaction purposes.


The difference between M1 and notes in circulation is that the former includes demand deposits. For the same period narrow money (M1) officially recorded an annual growth of 234% whilst broad money (M3) increased by 223%. By comparison, the year-on-year CPI inflation figure for December came out at 132,7%. Now, the huge discrepancy between the supply of money — both broad and narrow — in circulation and the inflation rate of over one hundred percentage points would in some way suggest that one set of figures could be wrong. Adding to this lot, the inconsistencies that we have highlighted, in earlier columns, concerning the 2005 budget proposals growth rates, which average around 251% for both expenditure and revenue, in contrast to an expected year-on-year inflation outturn of between 20-35% by December 31, again reinforces our earlier assertion.

Looking back to Say’s Law, the growth of currency in circulation, by way of interpretation could mean that there is a higher demand for money for transaction purposes. That is, the increase in the supply of money is creating its own increase in demand.


Another perspective would seem to suggest that prices may have been actually higher than captured by the CPI numbers — otherwise why would notes in circulation need to increase by a greater amount than the 133% recorded by price increases during the same period, especially when real output has at least certainly been falling?


Experts from the IMF and the World Bank concur with the fact that the increase in money in circulation and M1 is a better proxy for the inflation rate in hyper-inflation economies like ours, especially given the fact that our CPI basket has been overtaken by events, than either M2 or M3.


The CPI figure for March released last week shows a year-on-year increase of 123,7% and a month-on-month rate of 4,2%, just 1,1% points above the January figure of 3,1%.


According to the Central Statistical Offices, the increase was accounted for by a rise in the average prices of “fruits and vegetables”, beverages, meat and clothing. Of the 4,2% rise, food price increases accounted for 2,3 percentage points.


The increase in the annual inflation rate was largely driven by increases in telecommunications costs of 1 097%, education fees 500% and medical fees 137%. Again rent and rates notched up a curious 0,1% month-on-month decline.


After that brief on the perplexing inflation figure we now look at the six months results to February 28 from Astra Industries and Cairns.


Starting with the former; a virtual standstill position was achieved with attributable earnings growing by a marginal 4%, from $14,5 billion in the corresponding period to $15 billion. The top line grew by a sub-inflation 76% to $98,5 billion as volumes declined 18% in the main business of paint manufacturing and industrial chemicals volumes were stagnant. A decline was recorded in the smaller division, Astra Steel Supplies.


The now infamous above inflation increase in operating costs, against a shrinking revenue base devoid of pricing opportunities, saw operating margins halving to 20% as operating profits at $20,3 billion were lower than the $22,2 billion achieved in 2004.


A $3,3 billion interest inflow, obviously stemming from positive cash generation which saw cashflows from operations generating $17,1 billion, resulting in a bank balance of $20,6 billion as at reporting date, boosted the growth in the bottom line. The new acquisition, Celmid contributed $3,1 billion and $895 million to turnover and profits, respectively, in the four months since it became part of the Astra family. A $37 interim dividend was declared.


Cairns’ results were much better, with turnover growth of 184% to $200,4 billion being recorded, as volumes were up by 23%. Operating margins, as expected, came under pressure, declining by 14 percentage points to 22%, whilst operating profits grew by 1,8 times to $45,4 billion.


The group remains in an interest paying position, with an outflow of $5,1 billion in the six months under review compared with $4,9 billion in 2004.

Attributable earnings doubled to $23,1 billion. Notwithstanding the positive cash generation and a healthy bank balance of $10,1 billion, the board did not declare an interim dividend, opting to invest in raw materials and packaging to avert possible shortages.


The two companies, together with Tractive, came out of the unbundling of Astra Ltd in 2001. Since then massive shareholder value has been unlocked.


At the time of the effective de-merger of Astra Ltd on August 17 2001 its trading price prior to its suspension on July 9 was $17,50. By last Friday, the share prices of the three listed entities into which it was split on a one-for-one basis were $480, $2 300 and $840 for Astra, Cairns and Tractive, respectively.


Assuming an initial investment of 1 000 Astra Ltd shares, the value of the investment would have gone from $17 500 to $3,62 million. You can work out the return on investment and shareholder value that has been created.