Beware of the inflation dragon
Annual inflation rose to 66.1% in February from 60.61% in January. Month on month inflation was up 1.7 percentage points to 5.3% in January with experts projecting it to reach double digit levels by year end on the back of unchecked spending by the government.
The Reserve Bank of Zimbabwe projects annual inflation at between 25 and 35% by the end of the year and has put in place a number of measures to contain money supply growth.
In his Monetary Policy, central bank chief John Mangudya acknowledged that the current inflationary pressures within the national economy required the apex bank to further tighten monetary policy to stem exchange rate volatility and anchor inflation expectations, while at the same time safeguarding the ongoing recovery of the economy.
As part of the measures, Mangudya reduced the quarter on quarter reserve money target to 7.5% from 10% for the quarters ending March and June 2022, which target will be reviewed thereafter.
He said the revised quarterly reserve money growth target is consistent with the envisaged economic growth rate of 5.5% in 2022 and the expected year-end inflation of 25-35 %.
He said the central bank would continue with its liquidity management by aligning its Open Market Operations to liquidity injections by Government to avoid excess liquidity in the banking system emanating mainly from payments for infrastructural development projects.
This has been the bone of contention by a number of economists who have been arguing that huge payments to contractors have been feeding the parallel market.
Those with huge local currency holdings would prefer a stable currency such as the dollar.
On their part, monetary authorities have put in place a number of tools to contain money supply. However, it is the Treasury that has been found wanting.
While the Treasury is credited with halting borrowing from the central bank, the huge payments to contractors have weighed down measures put in place by monetary authorities.
Another elephant in the room which is set to affect inflation projections is foreign currency shortages.
Last year, Zimbabwe generated over US$7bn in foreign currency proceeds which would have been enough to cater for the needs of the economy.
The events in Ukraine have seen a spike in the price of oil. No one knows when the war will end. What is clear is the global spike in the price of oil will be felt in Zimbabwe through imported inflation.
The hike in the fuel price triggers a similar response on the prices of goods and services in the economy.
Zimbabwe has to contain what it controls. Cutting the coat according to the size of the cloth is one of the solutions as prospects of a rosy future are fading by the day.
