A fragile stability
The government is on a crusade to fight inflation and seems to be winning with month on month inflation dipping to 12.4% in August from 25.6% in July.
Annual inflation, which rose to 285% in August from 257% in July, is projected to continue on the upward trend to reach an annual peak in September due to the lower base effect in 2021 before tapering off.
It says the drop was expected while annual inflation will continue rising to reach an annual peak in September 2022 due to the lower base effect in 2021.
The tight monetary policy measures are being implemented to shore up the local currency, which has in the past been routed on the parallel market.
However, these measures are bringing unintended consequences with business leaders warning the liquidity squeeze would suffocate enterprises. This, the business executives said, would affect aggregate demand.
“On the downside, we are experiencing tight liquidity in the market. This liquidity squeeze could weigh on aggregate demand, levels of production and asset values. What it means is that operators may fail to fund their businesses as well as capital needs. If not watched closely, it will have unintended consequences,” Old Mutual Zimbabwe CEO Samson Matsekete told an analyst briefing last week.
It is a warning the government cannot ignore as this will drag the economy into a recession.
The hiking of the bank policy rate to curb speculative borrowing has made the cost of money expensive in the economy. This leads to subdued lending thereby affecting liquidity in the market.
The Bankers Association of Zimbabwe warned last week that the liquidity squeeze has affected agriculture lending ahead of the upcoming 2022/23 agricultural season.
“Once the liquidity situation improves we will participate strongly as far as lending is concerned. As of now we are participating but not to our potential because of the liquidity constraints,” CEO Fanwell Mutogo said last week.
Local farmers require funding for the agriculture season as the obtaining prices cannot sustain them to buy the inputs.
For businesses, they should be wary of low aggregate demand which is bad for an economy. If there is no traffic to the shops, it signals a gloomy outlook for business. Closures and retrenchments will follow suit which will be bad for the administration with a general election less than a year away.
IH Securities said this week that efforts by the regulator have brought about a fragile stability in the monetary space with reduced speculative behaviour from players.
Further infrastructure spends and payments to fund the 2022/2023 season summer cropping season pose downside risk to money supply growth which may have a knock on effect on inflation and exchange rate dynamics, the securities firm said this week. Monetary authorities face a tough task to balance the need to contain inflation on one hand and stimulating aggregate demand on the other.
