INFLATION, with relation to economics, refers to a general increase in the overall cost of goods and services in a country. Each unit of currency may purchase fewer products and services as the general price level rises; hence inflation is associated with a decline in the purchasing power of money.
Zimbabwe currently “boasts” of having one of the worst inflation levels in the world, flirting of an annual inflation of 255% as of November 2022.
While inflation is caused by any of the three main categories, cost-push, demand-pull and inflation expectations, in Zimbabwe all the three factors are driving inflation as the root cause is a weak currency. Cost-push inflation refers to the impact of higher costs from the supply side of the economy, while demand-pull inflation refers to a general increase in demand for limited goods in an economy.
Inflation-expectation refers to the anticipation of a general increase in prices, which then consequently affect the current prices as consumers act on the speculation. A weak currency, on the other hand, refers to money that is constantly depreciating against other hard currencies usually due to weak or poor economic fundamentals as well as poor governance of the country, which drives down overall sentiment.
With a weak currency in use, the aforementioned cost-push inflation emanates from an increase in input costs as suppliers seek to chase value amid a fast depreciating currency; while the demand-pull inflation emanates from the increased disposable incomes as remunerations increase in chase of real value of a fast depreciating currency.
The inflation-expectations also tend to weigh in as consumers lose trust in a weak currency and thus opt to dispose of the currency in place of other goods and services thus increasing demand and the cycle continues. The US dollar has appreciated by over 300% against the local unit. This therefore renders the Zimbabwean dollar as a weak currency comparative to other currencies globally.
The question, therefore, is: why would the government stick to a weak currency at a time they should be stabilising the currency issue as a campaign strategy ahead of the harmonised elections in 2023? The answer lies in assessing the pros and cons of sticking to a local currency in place of adopting a foreign hard currency.
As a base definition, a hard currency is a currency that is not likely to depreciate suddenly or to fluctuate greatly in value. Adopting a hard currency as a country, something Zimbabwe did during the Government of National Unity (GNU) era, tends to stabilise the local industry within the parameters of the country as demand and supply will be at equilibrium.
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This ensures a better welfare of the citizens of that country in the short-run as disposable incomes improve to levels sufficient enough to sustain a better livelihood due to a stable exchange rate, which insures a fair pricing model for goods, and value preservation in liquid form for incomes.
The drawback, thereof, will be felt on the balance of payment of that country which will dip to the negative. This is because a hard or strong currency has the effect of making exports expensive if the destination country has a weaker currency than the exporting country.
A weak currency tends to weaken faster than prices can catch up. In the long-run, a recovery of prices of goods expressed in terms of a hard currency may never happen. This renders those same goods cheaper for someone importing from a country that uses a stable currency. As Zanu PF plays a long-game of vision 2030, focusing on short-term economic stability may not yield positively for them in the next five years.
While maintaining control of an official currency may raise the currency’s susceptibility to abuse by the government, the long-term effects on the overall economy tend to be positive. As a food for thought, should governments focus on economic stability by resorting to hard currencies or focus on long-term growth by using a weaker currency? Let’s watch the spaces in the next five years.
Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_
