HomeBusiness DigestDevaluation will push inflation up - Finhold

Devaluation will push inflation up – Finhold

Godfrey Marawanyika

ALTHOUGH the central bank devalued the local currency by 94%, much to the relief of exporters, Finhold Financial Holdings has warned that the curre

ncy adjustment against the US dollar will increase the rate of inflation and push the cost of imports up.

In its analysis of the monetary policy, Finhold said although the central bank remains optimistic that inflation will start falling in September, the situation on the ground shows continuing inflationary pressures.

“We are however of the opinion that inflationary pressures will still remain very high in the economy up to the end of the first quarter of 2006, when the harvest from the 2005/2006 agricultural season starts to filter into the market,” Finhold said.

Zimbabwe, in its second straight year of drought, has to import food for three million citizens threatened with hunger. The group said the full impact of the recent price increases on transport costs, the expected upward adjustment in electricity tariffs, and costs push effects of wage and salary adjustments, usually done in July, would add to the pressures on inflation.

“Moreover, the devaluation of the Zimbabwe dollar to US$1:$17 500 will certainly push up import costs, hence prices of imported goods and raw materials, which will feed into inflation,” Finhold said.

“The continued existence of the concessionary 20% agriculture facility and high growth in credit will also lead to high levels of monetary expansion. Therefore, the RBZ inflation target of 80% by December 2005 certainly looks ambitious and will be difficult to achieve.”

In his monetary policy presentation last week, Gono said during the first half of the year, daily money market averaged $352,9 billion, peaking at $662 billion in March as the RBZ sought to control inflation through a tight liquidity management.

The central bank has maintained a tight monetary policy by increasing the secured accommodation rate from 160% to 180%, while the unsecured accommodation rate was raised from 170% to 190% with immediate effect. The RBZ maintained its dual interest rate policy after it retained the 20% agriculture facility, although it has scrapped the 5% exporters borrowing facility.

The RBZ is hoping for interest rate convergence by December this year.

“The continued existence of a dual interest rate regime certainly poses challenges to the monetary authorities as it naturally presents arbitrage opportunities for some economic agents, and exerts continued pressure on growth and money supply,” Finhold said.

The financial services group said although exporters would benefit from the devaluation, it was important that the authorities consistently adjust the exchange rate in line with domestic inflation developments relative to the trade weighted inflation rates of the country’s trading partners. By continuously adjusting the rate, this would make exports competitive on the international markets.

“On the downside, the scrapping of the 5% exporters borrowing facility is likely to have adverse impact on some non-agriculture exporters, especially those who are heavily borrowed,” Finhold said.

“These will now be borrowing at market rates, which are currently close to 190%. While the RBZ argues that adequate compensation has been provided through the adjustment in the exchange rate under the enhanced carrot and stick incentive, some of these exporters’ cashflow will be adversely affected.”

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