INFLATION has over the last two years threatened Zimbabwe’s macroeconomic stability having peaked at 835% in July 2020 and remains in the triple-digit region. Archeologically, exchange rate trickle-down effects have been the foremost anchor of run-away inflation, with the central bank confirming the very strong cross-linkage between exchange rate movements and inflation.
The flying green flags inasfar as constrained Money Supply growth, a stabilising exchange rate between the Zim dollar and the greenback plus restricted capital flight from the ZSE serve to explain the declining inflation rate Zimbabwe has experienced in recent months, a trend likely to be sustained over the next 12-18 months ceteris paribus. The most recent inflation statistics reveal: the year-on-year inflation rate for the month of March came in at 240,55%, flaking 81,04% from February’s 321,59% figure (which had also narrowed by 41,04% from the January number) — great strides in the right course.
Meanwhile the month-on-month inflation came in at 2,26%, shedding 1,19% from the 3,45% recorded in February to record its lowest outturn since October 2018. Effectively the month-on-month inflation dropped into the Reserve Bank of Zimbabwe’s inflation target of below 3%, a confidence booster to the optimistic 10% annual rate target set by the central bank.
In the National Development Strategy 1 (2021-2025) Treasury envisages an average annual inflation rate of 134,8% in 2021 from 654% in 2020, vis-a-vis a bullish target of 5,8% in average annual inflation. Comparatively, Fitch Solutions, an international ratings agency in its BMI Country Report for Zimbabwe anticipates Zimbabwe’s average annual inflation to “slow down” to 136,5% in 2021.
The RBZ is aiming to tame inflation by soothing the exchange rate by way of guaranteeing a sufficient supply of foreign currency on the forex auction market. Notably, the Zim dollar has shed about 3% of its value on the interbank since the year started. The RBZ’s forex auction has largely been funded by export submission requirements (40%), obligatory local foreign exchange sales proceeds (20%) and foreign exchange contribution from the fiscus (15%).
Nevertheless, there are ostensibly supply issues given the broadening breach between the official exchange rate and the informal market rate amid reports of apportionment logjams. This then explains why the parallel market has been trading at a 40% discount to the official rate given continued constraints such as low foreign exchange reserves translating to truncated liquidity in the system.
Money supply is also a key factor to the inflation matrix. The central bank is targeting to tame reserve money growth to under 22,5% per quarter in 2021 from 25% in 2020, in a bid to maintain a grip on the relative inflation and exchange rate stability being currently experienced in the country. In the week ending March 12, Reserve Money declined by ZWL1,91 billion to ZW$18,72 billion from ZW$20,55 billion the previous week on the back of a reduction in banks’ RTGS balances at the RBZ.
These measures have also been propped by a tightening fiscal discipline by the Treasury. In light of this, I expect inflation to remain bridled in the short-to-medium term on the grounds of advances in agriculture and mining output, as well as domestic energy production. Of note, Zimbabwe expects an output of 2,8 million tonnes of maize and 360 000 tonnes of traditional grains – the largest yield achieved since the land reform started in 2000.
This could potentially see an increase in foreign exchange reserves owing to reduced expenditure on grain imports, improving the RBZ’s ability to support the currency. On the flip side, money supply is expected to surge in the months to follow as the government prints more money to pay farmers for deliveries to the Grain Marketing Board in lieu of a ZWL60 billion harvest versus a balance of ZWL$13 billion in government’s coffers. However the former is likely to outweigh the latter.
Mabunda is an analyst and TV anchor at Equity Axis, a leading financial research firm in Zimbabwe. — ebenm@equityaxis.