fbpx
Thursday, March 28, 2024
HomeNewsOPINION: Taming Inflation Is An arduous Task

OPINION: Taming Inflation Is An arduous Task

www.263chat.com

The Zimbabwe National Statistics Agency (Zimstat) pointed that year on year (annual) inflation rate marginally increased to 51.55% in September 2021 from 50.24% in August 2021 after 8 months of straight decline from 363% recorded in January 2021. The increase comes in the wake of a widening spread between the formal auction rate (Now US$1: ZW$88.55) and the parallel market rate (Now averaging US$1: ZW$180).

The increase in the rate of inflation points to the deafening impact of the parallel market on the local economy with prices in major fast moving consumer goods retailers, key producers and service providers following the parallel market rate very closely. This means that only selected public services from the government and civil service remuneration are indexed using the formal auction rate. Furthermore, month-on-month (M-O-M) inflation rate in September was at 4.73%, representing an increase of 0.55% from the August 2021 rate of 4.18%.

Inflation and Poverty

Despite the marked decline in inflation rate since January 2021, the consumer basket continued to increase every month. The statistics agency highlighted that the Total Consumption Poverty Line (TCPL) for one person stood at ZW$6,654. The TCPL represents the total income needed for an individual with all their income added together as a minimum for them not to be deemed poor in the country. This means that an average family of six now requires ZW$39 924 per month to meet daily expenses, which translates to US$455 if the pegged formal auction rate is used and US$228 if the dominant parallel market rate is used. This means that the majority of the workforce in Zimbabwe in the public and private sector are now living in poverty as average salaries remain below ZW$20 000. The meagre salaries have crippled public service delivery especially in education and health care where civil servants operate on a permanent go-slow mode

Recovering from 2020

The World Bank Economic Report released in June 2021 contained some worrying trends on the increase in extreme poverty in the country. The report highlighted that the number of extremely poor reached 7.9 million in 2020 (Half of the population). The economic disruptions caused by COVID-19 lockdowns reduced jobs in urban areas and limited income generating opportunities in rural areas. The pandemic added more than 1.3 million people to extreme poverty in 2020 in an environment where persistent droughts (effects of climate change), high levels of inflation and economic instability were devastated many livelihoods. Annual inflation averaged 622% in 2020. The World Bank classifies the extremely poor as people living on less than US$1.90 a day (Less than US$57/month). Extreme poverty in Zimbabwe increased sharply in 2019 and 2020, growing from 29% in 2018 to 34% in 2019 and 49% in 2020. This means that more than 2.2 million Zimbabweans sank into extreme poverty in those 2 years. This year poverty levels are expected to decline due to above normal rainfalls received in the 2020/21 agricultural season. The pace of re-dollarization and the marked decline in inflation levels also means that disposable incomes have not been eroded at the same pace they did in 2020.

ALSO ON 263Chat:  Algerian Police Crush Zim Students Demo Against Non-Payment of Stipends

Major causes of inflation

Emirates

Though inflation rate has remarkably weakened, it remains high to provide any support for the waning local currency and guarantee sustained economic stability. The major causes of inflation in the economy are the growth in money supply, with reserve money growing from below ZW$22 billion in January 2021 to ZW$29 billion as at the end of August 2021. Government payments to maize, tobacco, wheat, soya and cotton producers have a direct effect on increasing money supply and stroking foreign currency demand on the parallel market. The easing of lockdown restrictions also saw the opening of various small businesses and informal markets where imported merchandise is sold, which means demand for foreign currency by cross border traders and households has also gone up. The trend is likely to be sustained till the festive season ends in January 2022. This means that the parallel market rate is expected to continue firming. Additionally, auction market inefficiencies have also increased demand for foreign currency on the parallel market by corporates.

Auction Market Inefficiencies

The auction has so far allocated US$1.734 billion to formal producers and businesspeople in the market since June 2020 versus formal demand for foreign currency exceeding US$5.5 billion in a year. This means that successful bidders receive between 20% and 30% of their foreign currency needs from the auction platform with the rest coming from daily revenues and the parallel market. The auction market has so far allocated only 33% of the official foreign currency needed to fund imports into the country since June 2020. The figure does not take into account billions in smuggled imports and cross border trade where transactions are handled in hard currency to evade customs. Therefore, the auction platform is far from being efficient in allocating foreign currency to all players in the economy and the situation is only getting worse with allotment backlogs now going over 3 months while backlog is estimated to be US$270 million.

Critically, the system’s price discovery mechanism has been suppressed by the intervention of the central bank in pegging the exchange rate which means that holders of foreign currency (mainly exporters and foreign missions operating in Zimbabwe) do not see value in offloading excess foreign currency on the formal market. Foreign Currency Accounts (FCA) deposits with local banks have now grown to over US$1.8 billion and the trend is likely to be sustained provided the auction rate remains pegged well below the open market rate. The auction exchange rate falls short in reflecting economic dynamics such as the current account balance, money supply, foreign investments, and confidence. Added to this, the amount to be auctioned in each week is not known before hand, which means the auction virtually trades weeks ahead for foreign currency which is not available. This means the amounts traded or allotted in each week are plucked off head with limited input on foreign currency availability.

ALSO ON 263Chat:  Chipanga blasts police over corruption

Improving the Auction System

To address the above inefficiencies, the central bank needs to improve on transparency by communicating beforehand the exact amount of foreign currency available to bidders and commit to settling winning bids with 3 days (T+3). This means the weekly auction should only be carried out if winning bids from the previous week are fully settled and records show that winning bidders are utilizing the foreign currency for declared purposes. The bank should also weed out producers and retailers (especially petroleum players) who sell their products exclusively in US Dollar or using parallel market rates. Additionally, the central bank needs to learn from past mistakes where fixing the exchange rate bled the local economy and drained export capacity. Exporters and foreign currency holders need to be allowed to trade their foreign currency at market determined rates where the auction market is decentralized from central bank control. The central bank must emulate basic tenets of central bank intervention by using policy incentives and market instruments to mop up excess liquidity. Similarly, reducing inflation can only be achieved sustainably through restricting money supply growth and aligning interest rates to inflation levels.

The government of Zimbabwe revised upwards its target for reducing annual inflation to below 35% by December 2021 but the growth in money supply, heightened demand for foreign currency and auction market inefficiencies are making the task of taming inflation an arduous one. The task would require sufficient fiscal reforms on how the government finances payments for agriculture commodities and weaning the auction system from central bank control to ensure free market price discovery. Undoubtedly, both tasks have collateral damage on the entrenched interests in the government and beyond. Factoring the above, annual inflation is largely expected to be between 50-65% in December 2021.

Share this article
Written by

News Editor with 263Chat

No comments

Sorry, the comment form is closed at this time.

You cannot copy content of this page