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IMF revises inflation forecast up

THE International Monetary Fund (IMF) has revised upwards its forecast for Zimbabwe’s inflation outlook for 2020 from its February 24 forecast of 221,1% (Consumer Price Index-based annual average) to 319%.

The Brett Chulu Column

Let not the average inflation statistic deceive us — it masks the huge month-on-month CPI-based inflation. The average inflation for the past four months is above 500%. The estimated April month-on-month inflation is almost twice the new IMF annual average. The IMF forecast may be a serious under-forecast. Let us brace for a rapid and sustained fall of the purchasing power of our Zimbabwean dollar.

The disinflation story our authorities have been telling the world may turn out to be a wish.The IMF inflation upward revision coincided with the IMF’s revision of Zimbabwe’s real gross domestic product (GDP) forecast for 2020, which was revised from 0,83% to a whopping -7,4%. This means Zimbabwe will be in a recession for two consecutive years. The negative GDP growth combined with an uptick of inflation implies that the IMF sees Zimbabwe experiencing stagflation.

Stagflation is an anomaly to monetary theory; according to monetary theory, low economic growth and high inflation cannot occur simultaneously. The reason low economic growth and high inflation cannot co-exist as per monetary theory is that elevated inflation should trigger resistance to further price hikes at some point, forcing producers to reduce prices. To explain this anomaly, monetary theorists finger either government and/or the central bank for implementing conflicting economic policies. Could this be true for Zimbabwe?

We have to answer two questions to explain why Zimbabwe is experiencing stagnation. The first question is: Why is our economic growth declining at such an alarming pace? The second question is: Why are we experiencing elevated inflation when we have no real economic growth at all?

Declining economic growth

Real economic growth comes from a growth in production and productivity. This is the underpinning driver of economic growth. The question is: why are production and productivity in our economy expected to decline by a huge quantum? Before Covid-19 became a clear threat to our local growth, the IMF projected a 0,8% real economic growth for Zimbabwe.

Our Treasury projected a real economic growth of 3%. In his recent letter to the IMF, Finance minister Mthuli Ncube revealed that economic decline of 15% to 20% over two years (2019-2020) was expected. If Treasury had initially projected a growth in our economy of 3,3%, then a massive decline of 8,5%-13,5% this year is expected. What has significantly changed between the rosy 3,3% projection and the expected 8,5%-13,5% decline are two things: failure to meet the IMF’s Staff-Monitored Programme (SMP) and Covid-19.

Treasury had projected a recovery in agriculture based on divining a fairly good rainy season. Independent stakeholders in the tobacco industry indicated that late rains boosted tobacco growth, hence a reasonable tobacco season is expected. This will leave us with an inference that Covid-19 is the key driver of the expected massive economic decline — Treasury based its initial rosy 3,3% 2020 growth forecast on growth in agriculture and mining.

It would be unfortunate if Covid-19 becomes the scapegoat for the recession, covering up on policy failure. In an article titled 2020 economic outlook scary, this writer disputed the 3,3% twenty-plenty narrative based on a straightforward argument: the enablers of growth in mining and agriculture were not in place; erratic and expensive power supply, expensive credit, shortage of foreign currency for importation of production enablers, debt overhang, unstable local currency, policy inconsistencies, barriers to repatriation of profits by foreign investors, dead land market, among others. These issues are still dogging the production and investment environment. Covid-19, without doubt, will contribute to shaving off economic growth.

However, our fundamental policy implementation challenges and the unaddressed structural weaknesses cannot be overshadowed by the Covid-19 shock. Our failure to meet the SMP targets lies at our doorstep. It is within our power to address the issue of property rights with respect to commercial farming land. It is within the remit of government to liberalise the allocation of forex by the markets. It is within government’s lane to address rampant grand corruption. We cannot continue treating droughts as shocks — climate smart solutions such as irrigation and technologies that cut on water consumption are available.

Stubborn inflation

The matter of incessant inflation is largely a policy failure issue. There are four primary reasons the inflation dragon is raging without ceasing.
First, monetary indiscipline is rife. The funding of quasi-fiscal activities through money-creation that outpaces real economic growth has been habitually employed. Incentives for gold purchases from small-scale gold miners have been happening under the radar (meaning these were funded outside the budget). This quasi-fiscal activity has added to currency weakening.

The IMF indicated that the most viable monetary policy tool for Zimbabwe for now to significantly bring down inflation rate (disinflation) is reserve money targetting. It is easier said than done. The gold incentive was created because the central bank had to meet the terms of the loan covenants with a pan-African bank that extended over US$1 billion cumulatively based on a structured finance deal, with future gold production pledged as a guarantee.

The authorities gave an undertaking to the IMF that the gold incentive scheme would cease. How will the central bank entice small-scale gold miners to continue selling gold to the central bank in the absence of that incentive? Doing so will be a massive gamble, given that these small-scale gold miners account for about 60% of gold output? The pressure to continue with money-creation is still high. With debt relief efforts scuttled, the pressure to resort to money-creation will be very high.

Third, the use of the visible hand to allocate forex is a driver of currency volatility and inflation. The policy of taking away a sizeable chunk of the forex earned by exporting producers in lieu of a unstable local currency at sub-market prices and taking the cheaply acquired forex and preferentially allocating to a few privileged entities at sub-market prices has had the effect of creating forex-trading arbitrage opportunities.

The authorities gave their word to the IMF that this practice would cease. Only time will tell. The de-dollarisation draft paper showed an intention to significantly increase the proportion of forex the central bank will take from exporters. It is in direct conflict with the IMF’s recommendation to remove forex restrictions. The de-dollarisation draft paper puts forward a proposal to maintain dual exchange rate regimes, signalling a reluctance to speedily liberalise the forex market as per the IMF’s advice. Such policy choices, if effected, will further dent market confidence, translating to a discounting of the local currency.

Fourth, the premature re-introduction of the local currency and outlawing of tendering forex for local transactions has contributed to the continued weakening of the local currency. The decision by Treasury to devalue the mountain of currency created 2013-2017 through surreptitiously monetising budget deficits (printing of money through RTGS balances, including bond notes), illogically calling it the US dollar was necessary.

It could have succeeded without having to ban the multi-currency regime. The confidence deficit as a result of mishandling the local currency re-introduction and continued massive money-creation under new guises continues to spook the local currency. That confidence deficit manifests itself as local currency devaluation and unremitting inflation.

Our stagflation is largely due to poor economic policy choices and the lack of political willpower to fully implement the few sensible policy promises we have told the world we would.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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