Blended inflation erodes trust on financials: CZI

LIVINGSTONE MARUFU

Zimbabwe’s largest business lobby group, the Confederation of Zimbabwe Industries (CZI) says a decision by the government to enforce the use of blended inflation rate has raised the prospects of distorted financials reported by local companies.

This results in loss of public and investors trust on financials published by companies.

In its latest report, CZI said the blended inflation rate distorts companies’ financial results.

“Business is desperately looking for some estimates about inflation rates of the currency in use (that is US$ and ZWL$), which have been currently denied by the authorities.

“This is largely because there are some key decisions that are calling for the use of inflation for which the blended rate is proving to be inadequate,” CZI said.

The call CZI comes after the Finance and Economic Development minister Mthuli Ncube recently enacted Statutory Instrument 27 of 2023 enforcing the use of blended inflation rate.

Blended inflation is generally a composite inflation, reflecting US$ inflation and the ZWL$ inflation.

Zimbabwe’s blended annual inflation rate stood at 87.6% in March from 92.3% in February.

The month-on-month blended inflation rate in March 2023 was 0.1 percent gaining 1.7 percentage points on the February 2023 rate of -1.6%.

According to CZI, there are about four developments that can explain a change in blended inflation rate change in the US$ inflation rate, change in the ZWL$ inflation rate, changes in the weights being applied for US$ and ZWL$ and inflation in blending, a combination of all the three.

“Currently, ZIMSTAT does not make public any of these besides publishing a blended rate, so it remains a guessing game as to what might have caused the movement.

“With the parallel market rate increasing significantly in March, it is likely that the increase was caused by an increase in ZWL$ inflation. Since blended inflation is a composite number whose components are difficult to figure out, it is also difficult for a business to make any use of the blended inflation,” CZI said.

Experts said one of the most accurate ways of estimating the ZWL$ inflation is to use the changes in the Total Consumption Line (TCL) for Zimbabwe, which is measured in ZWL$.

Approximation of ZWL$ inflation, generally, the same basket of products is being used to measure food poverty lines consistently.

“Whilst these do not represent the whole basket measured by inflation, they at least help indicate the direction in which the general prices have been increasing.  A look at the trends since November 2021 shows that the Total Consumption Line [TCL] inflation and the annual inflation are closely related.

“Specifically, annual inflation was on average about 17.6 percentage points lower than the TCL inflation, or about 89.8% of the actual value of the TCL inflation,” CZI said.

Based on the TCL inflation level of 206.7% for March 2023, the actual ZWL$ inflation for Zimbabwe in March could have been anywhere between 185% and 189%, according to CZI.

This means that controlling the ZWL$ inflation is still a battle far from won by the authorities.