By Wadzanai Tadhuvana
IN his mid-term budget review speech on July 29, 2021, Finance and Economic Development minister Mthuli Ncube announced that the year-on-year inflation as at that date stood at 56,37% and 2,56% for month-on-month inflation. Additionally, year-on-year inflation is expected to decline to 35% by December 2021.
This was exciting news as it was the first time that we had double digit inflation since 2019. Zimbabwe adopted hyperinflation reporting for financial periods ending on or after July 1, 2019. This was after a pronouncement that the economy had met the conditions of International Accounting Standard 29, Financial Reporting in Hyperinflationary Economies. These conditions are defined by the accounting profession and vary from definitions by economists and other professionals.
What is hyperinflation?
Normally, financial statements are presented on a historical basis, that is, based on the exact amount of transaction, so ZW$500 paid as advertising costs in January is still shown as ZW$500 after December when financials are prepared. But when the following conditions exist, they must be restated by applying a general price index (based on inflation rate):
The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
Interest rates, wages, and prices are linked to a price index; and
The cumulative inflation rate over three years approaches, or exceeds, 100%.
By the end of June 2019, Treasury suspended the publication of annualised inflation figures and the year-on-year inflation figure stood at 176% as at that month, thus we were a hyperinflationary economy.
The general price index that we use in Zimbabwe to restate the financials is the consumer price index (CPI), which is released monthly by the Reserve Bank of Zimbabwe (RBZ).
The CPI is the weighted average of prices of a basket of consumer goods and services (per investopedia). The calculation takes into account the changes of each item and averaging them.
Only non-monetary items are restated while monetary items are not restated. A gain or loss on the net monetary position is calculated, included in net income and disclosed separately on the financial statements. This is a mere balancing figure in my view.
Hyperinflation reporting is interesting as it takes away comparability — one period could be historical and another in hyperinflation; these two cannot be easily compared.
However, some might argue that by taking the hyper inflated figures and dividing them by the prevailing exchange rate, one will get to the true United States dollar exchange position.
Hence, the announcement that year-on-year inflation was now at 56,37%, meant that we had gone below 100% and hence a review of conditions supporting hyperinflation is warranted.
Now fast forward to the Zimbabwe National Statistical Agency (ZimStat)’s statement dated September 27 regarding the month’s inflation figures. Month-on-month inflation is up by 0,55 percentage points from 4,18% in August to 4,73%.
Year-on-year inflation currently stands at 51,55%. Thus, month-on-month inflation has increased while year-on-year is decreasing.
The figure shows that the month-on-month inflation is fluctuating significantly, generally below 5% while, interestingly, the annual inflation rate is falling rather fast. Of course there was an increase in annual inflation from 50,25% in August to 51,55% in September, but that is rather low given where we are coming from. Therefore, are we getting out of hyperinflation?
How to get out of it
The International Accounting Standard on hyperinflation (IAS29) says that “when an economy ceases to be hyperinflationary, and an entity discontinues the preparation and presentation of financial statements in accordance with IAS 29 it should treat the amounts expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements.”
There seems not to be much guidance on how hyperinflation stops, I would presume that the reverse of what caused it is what will stop it. In this case, when inflation falls below 100% (over a three-year period) an economy gets out of hyperinflation. Unfortunately, our three-year inflation is still rather high.
The exchange rate as published by the RBZ (the interbank rate) currently stands at around ZW$89:US1 while the parallel rate is almost double (as per Marketwatch). This begs the question, has inflation really been falling and how sustainable is it?
Augmentation of the auction market to fully satisfy the formal sector and the recent announcement by the government that individuals would be able to buy limited US$ from bureaux de change at the auction rate will hopefully see a decline in the parallel rate. Conversely, for individuals this may rubberstamp the fact that the population prefers to hold US$ instead of the Zimdollar.
Zimbabwe adopted hyperinflation reporting in 2008 and abandoned it after the adoption of the multi-currency system in 2009. Thus, it is possible for us to get out of hyperinflation. Nelson Mandela was placed on the US terror list in the 1980s, only to be removed from that same list in 2008, and in the same vein, it was very easy for Zimbabwe to slide into hyperinflation, but it will take a lot of effort and time to slide out of it. This effort should be on the part of the government, the business community and individuals.
Some of the other countries that are hyperinflationary as of December 31, 2020 are as follows:
- Islamic Republic of Iran
- South Sudan
- Syrian Arab Republic
I believe that with the current happenings in Afghanistan, they may be joining our list of infamy soon.
“There is no greater agony than bearing an untold story inside you.” Maya Angelou wrote in I Know Why the Caged Bird Sings, and it speaks to me.
- Tadhuvana is an award-winning writer .She is also a chartered accountant — @WadzieTads (Twitter), wadzie_tads (Instagram) Wadzie Tads (Facebook) or www.wadzietads.com