HomeBusiness DigestGovernment spending spurs inflation target review

Government spending spurs inflation target review

Paul Nyakazeya

RESERVE Bank of Zimbabwe (RBZ) governor Gideon Gono is expected to revise his inflation target during his half-year monetary policy review due this month.

Sources said Gono is expected to announce a new inflation target of around 500%, up from an initial year-end target of between 220% and 230% that he had projected in his January monetary policy statement.

Analysts said excessive growth in money supply at 590,6% for April, rising fuel prices and foreign currency shortages are some of the issues that the governor should address if inflation is to be controlled.

Analysts who spoke to businessdigest this week said Gono would be forced to revise his targets. They said money supply growth and excessive government spending had mitigated against his ambitious inflation forecasts.

Finhold group economist, Best Doroh, told businessdigest inflation was likely to soar to 2 000% by year-end.

“The bank should look at factors that have been driving inflation upwards and adopt solid long-term measures to stop such developments,” Doroh said

“What has been pushing inflation upwards is fuel increases. The effects of recent increases would be felt in the short-term,” Doroh said.

The weakening of the local currency during the first half of the year has increased the local cost of imports, a situation that will add to inflationary pressures.

Andy Hodges, an economist with the Zimbabwe Allied Banking Group, said there was need for broad-based measures involving all major sectors of the economy if inflation was to be defeated.

“Fighting inflation should be set as a long-term goal, rather than a reactionary measure to negative developments in the economy,” Hodges said.

“All sectors must have learnt from last year and should start making long-term and timely plans now,” he said.

The country’s inflation rate for January was 613,2%. The figure rose to 782%, 913% and 1 092% in February, March and April respectively.

It is currently at 1 194% year-on-year for May.

In his monetary policy statement for 2006, Gono said he expected the combined effects of tight monetary policy, fiscal restraint and the expected improvement in food security this year to suppress inflationary pressure, predicting that inflation would end the year at “230%, before declining to lower double digit by mid-2007”.

Last year the Reserve Bank failed to meet its inflation target of between 50% and 80% by year-end.

The bank had initially projected inflation to fall to between 20% and 35% but subsequently revised the target upwards due to sustained inflationary pressure in the economy.

The inflation figure for December was 585,8%.

Independent economist consultant John Robertson said the most hopeful figure the Reserve Bank could aim to achieve was 800% by year-end.

“There are a lot of inflationary pressures at the moment and no measures have been put in place yet to control inflation,” Roberson said.

Robertson said he was not prepared to forecast a figure by year-end because of the chaotic nature of Zimbabwe’s statistics, some of which have been disputed by independent observers.

“It would be difficult to rein in inflation at the moment as most commodities are being pegged on parallel market rates,” said Robertson.

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