REVELATIONS that inflation has shot up to 4,29% — the highest in six years — is symptomatic of the government’s fiscal indiscipline and an indicator of the deepening economic crisis .
By Kudzai Kuwaza
The year-on-year inflation rate hit 4,29% in July 2018, up from 2,91% in June 2017, an increase of 47,48% in the Consumer Price Index (CPI) which measures changes in the general price level, driven mainly by food and non-alcoholic beverages, according to figures released the Zimbabwe National Statistical Agency (ZimStat).
The figures point to an economy in deep recession.
For a while Zimbabwe’s economy has taken a battering from a debilitating liquidity crunch, severe cash shortages, company closures, low investment inflows and the continued hemorrhaging of jobs as companies struggle to stay afloat.
Inflation has also been stoked by the skyrocketing parallel market rates created by the acute shortage of foreign currency as well as the Reserve Bank’s decision to introduce the bond note which has depreciated in value to the United States dollar.
This is despite assurances by the central bank, ahead of the introduction of the bond note in 2016, that the fiat currency would trade at par with the greenback.
The promise has since been proven to be a fallacy.
The parallel market rates have risen sharply since the holding of elections on July 30.
Statistics released by the Reserve Bank of Zimbabwe (RBZ) in June show that the trade deficit for the first four months of 2018 stood at US$998,8 million, which is far higher than the same period last year when it stood at US$603,1 million.
The central bank noted that the external sector position has remained considerably under pressure on account of deep-seated structural challenges associated with fiscal constraints, current account deficit, limited access to foreign finance, debt overhang, limited supply of ethanol for blending and, more recently, the jump in international fuel prices.
The RBZ’s fiscal details for the first quarter of 2018 show government had cumulative revenue collections of about US$1,2 billion, against total expenditure outlays of US$1,4 billion, resulting in a budget deficit of US$225,4 million.
Employment costs constituted the largest proportion of total expenditure, accounting for 60,4%, followed by capital expenditure and net lending at 20,4%; operations and maintenance 15,8%, while interest payments stood at 3,4%. The deficit was largely financed through domestic sources, particularly the issuance of Treasury Bills which have resulted in the private sector being crowded out.
The position has since worsened following the government’s decision to hike salaries of soldiers and civil servants by 22% and 17,5% respectively just before the elections held last month.
This has further burdened the bleeding fiscus which is reeling from a deficit in excess of US$2 billion.
Economist John Robertson said the rising inflation is a result of money supply growth far outstripping the rate of economic growth.
“The big problem is money supply growth which is growing at a rate of 35% while the economy is growing at only 3%, which is quite serious,” Robertson said.
He warned that with government looking to fund its ambitious Command Agriculture programme coupled with the recent hike in the salaries of civil servants, inflation could skyrocket.
Robertson said by awarding tax-free increments to civil servants, government has further weakened its revenue base.
Finance minister Patrick Chinamasa warned in May this year that the civil servants’ salary hikes will increase the wage bill to 120% from its current levels and widen the country’s fiscal deficit.
Chinamasa, who was speaking at the Women’s Conversation on Legislation with President Emmerson Mnangagwa, said the increases could make the wage bill grow from 90% of government revenue to 120%.
“Another problem causing cash shortages is the fact that we have a huge fiscal deficit. If there are any civil servants here, I want them to hear this clearly. Of every US$100 that we receive, 90% is going to wages. And this situation is going to be made worse by the recent salary or allowances adjustments with the nurses, doctors and teachers and the rest of the civil service. I may not be surprised to find out that will be not 90%, but 120%,” he said.
Business consultant Simon Kayereka predicts that inflation will worsen unless government takes bold measures to stem the tide.
“The fiscal space has been closed mainly by government borrowing,” Kayereka said.
He added that the uncertainty created by the disputed election and the drying up of revenues from the tobacco season could further worsen the inflation rate.
“We are headed for tough times until political issues are resolved and measures are put in place to instill confidence for investment,” Kayereka said.
The grim state of affairs is a far cry from government’s repeated mantra that the economy is on the mend since Mnangagwa was inaugurated in November last year.
There are indications that the euphoria sparked by the toppling of former president Robert Mugabe in November last year has done nothing to stabilise the economy.
The Confederation of Zimbabwe Industries (CZI) launched its composite Business Confidence Index (BCI) earlier this year that showed that business confidence in Mnangagwa’s administration has dipped.
CZI president Sifelani Jabangwe said the composite BCI for the first quarter of 2018 stood at minus 14,4 for quarter-on-quarter basis and 20,9 year-on-year.
“This indicates lack of confidence and pessimism of business leaders for quarter-on-quarter business condition, but optimism of business leaders regarding the year-on-year economic situation,” he said.