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Economy at risk of high inflation

For the first time since November 2014, annual inflation has crept back into positive territory and the economy is at risk of rising inflation if fundamentals remain unattended to.

Financial Matters with Tinashe Kaduwo

A 1,6% increase in food and non-alcoholic beverages prices in the month of February together with a 0,7% increase in furniture and household equipment prices pushed month-on-month inflation up to 0,6% in February. Generally, food prices are expected to increase just before the harvesting period as food stocks deplete in anticipation of new harvests and especially now against the expected bumper harvest. The adopted Statutory Instrument (SI) 20 which entailed 15% VAT on selected food products including meat and cereals, although it was to be later lifted, had a huge impact on inflation exacerbated by the weight of basic food items. Prices are generally sticky downwards and it appears players, especially in the retail sector, did not adjust prices to their original levels prior to the introduction of SI 20, contributing to the 0,7 percentage points growth in annual inflation into the positive territory of 0,1%.

On a year-on-year basis, education costs were the major contributor to inflation, up 3,5% despite government’s push to lower education costs. Food and non-alcoholic beverage prices went up 1,3% on a year-on-year basis due to government’s protectionist policies such as SI 64, import prioritisation and depleted nostros that have affected the smooth flow of imports. The economy relies on imports for both consumption and industrial goods as well as key services due to the low capacity utilisation of the local manufacturing sector and de-industrialisation. Prices of furniture and household equipment, protected under SI 64, went up 0,3% on a year-on-year basis and 0,7% in the month of February, pushing up overall inflation. Annual negative price movements are being witnessed in communication, transport, electricity and fuel subsectors. Government’s price controls in the telecommunications industry have resulted in communication costs falling by 1,3% in February on a year-on-year basis. The competitive nature of the transport subsector together with lower international crude oil prices resulted in prices deflating in those subsectors.

However, there is a risk that official figures may not be capturing the correct trends in the market and the 0,1% might be understating actual developments in the economy. Cash shortages and the subsequent introduction of bond notes created serious distortions in terms of pricing in the market. There are five different prices for a product in the market, cash price (US dollar), cash price (bond note), transfer price (RTGS), transfer price (swipe) and transfer price (mobile money such as EcoCash and other similar products). All these prices may be difficult to capture, requiring closer scrutiny in the inflation numbers.

Despite all these distortions partly due to arbitrage and looking at the official numbers, overall annual inflation has returned to positive territory. Undoubtedly, the growth in inflation is not a result of improvement in demand given the current economic conditions but is coming more from policy intervention. There is fear that inflation may overshoot given the underlying challenges in the economy. Unbudgeted expenditures by the government, consumption-driven issuances of Treasury Bills (TBs) crowding out the private sector in terms of access to credit and investment, and a local currency in the form of bond notes are major sources of risk for high inflation. Given massive imports as a result of low local productivity, import restrictions and foreign payment gridlocks will create serious shortages of much-needed consumptive goods.

Runaway government recurrent expenditures financed through TBs issuances have seen domestic debt rising and the short-term securities scaling the US$2 billion mark, increasing the state’s debt servicing costs. Through its unsustainable expenditure pattern, the government is seriously undermining the viability of the economy through crowding out of private sector. Although the Finance ministry has advocated for reduced appetite for domestic borrowings, there seem to be limited options given the lack of opportunities for external support or borrowings.

Kaduwo is an economist at Equity Axis. — tinashek@equityaxis.net/ kaduwot@gmail.com

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