HomeuncategorizedCeteris Paribus: Inflation uptick: A negative tell-tale sign

Ceteris Paribus: Inflation uptick: A negative tell-tale sign

By Eben Mabunda

THE outturn of Zimbabwe’s inflation is indicative of structural issues in the economy and is therefore not the root of the nation’s economic woes but a consequence and a reflection of the unresolved macroeconomic challenges spellbinding the country.

Zimbabwe’s annual inflation up-ticked in September, ending a 13-month inflation decline trajectory, with compelling indications that the economy will reel from a rapid and sustained rise in prices in the months to come. Zimbabwe’s official statistical bureau — Zimstat — last week published that annual inflation as measured by the Consumer Price Index (CPI) for September came in at 51,55%, nearly 2% higher than August’s 50%.

The August 21 month-on-month inflation rate was 4,18% gaining 1,62 percentage points on the July 2021 rate of 2,56% and flying past the government’s target of 3%. The movement was sustained as the month-on-month inflation rate for September was 4,73%, gaining 0,55 percentage points against August’s outturn. In 2020, Treasury stopped the publication of headline inflation figures as it argued the indicator was not a true representation of Zimbabwe’s inflation trends as we were coming from a lower base in 2019, having peaked at less than 10%.

Conversely, the CPI figures published thus far were perhaps an inaccurate indicator of the local price movements considering headline inflation peaked at 837% in July last year — a higher base.  Monetary economist Milton Friedman once argued, “Inflation is always and everywhere a monetary phenomenon.”Zimbabwe’s inflation case serves as an empirical exhibit of his assertion.

In April 2021, the government announced that it would spend ZW$60 billion (US$685 million) on procuring grain from the local farmers through the GMB on the back of an unanticipated bumper harvest in as far as the 2021 budget was concerned.

While ZW$8 billion (US$91,3 million) of the figure was budgeted for under the Strategic Reserve, Central Bank chief Dr John Mangudya debunked the inflationary effect of printing the additional ZW$52 billion (US$594 million) to meet the requirements of the farmers on the basis that the spending would be phased and not abrupt. Additionally, the government increased the salaries of civil servants by about 50%, just over eight weeks ago, increasing liquidity in the economy.

Reserve money for the week ending September 24, 2021 declined by 0,82% to ZW$27,97 billion (US$319 million), compared to the previous week’s new high of ZW$28,2 billion (US$322 million). This decline largely reflected a decrease of ZW$429,3 million (US$4,9 million) in banks’ liquidity (RTGS balances) at the Central Bank. Partially offsetting the decline in reserve money was an increase of ZW$229,05 million (US$2,6 million) in required reserves.

Despite the weekly decline, the Reserve Money has surged 49%  year-to-date, having closed the year at ZW$18,8 billion (US$214,6 million).

It must be appreciated that Zimbabwe’s inflation is also highly elastic to the local currency movements and that the pricing psychology is deeply US dollar entrenched.  In Tuesday’s forex auction results, the Zimdollar weakened by the highest weekly margin since the beginning of the year, from 1:87,7 to settle at 1:88,6 against the greenback — a strong signal for the beginning of a market correction. The local unit is trading at rates 100% higher on the parallel market than the formal market rate.

The monetary authorities indicated that they would use more than half of the SDR funds received from the IMF barely a month ago “to prop up the currency” and promote economic stability. That would be an opportunity to liberalise the forex auction system, make forex more available and somewhat tame the parallel market. The government will have to continue pursuing measures that reduce new money creation, increase mopping up of surplus liquidity, and pursue policies that stimulate production and dig Zimbabwe from the net-importer position it holds.

In the medium-term, there is a need to curtail the exorbitant pilferage in the mining sector and provide security of land tenure in agriculture to enhance the bankability and capacitation of the sector.

Mabunda is an analyst and TV anchor at Equity Axis, a leading financial research firm in Zimbabwe. — ebenm@equityaxis.net

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