Firms reel under inflationary pressures

(Last Updated On: January 19, 2023)

PHILLIMON MHLANGA

 

Local companies are reeling under the impact of spiralling month on month inflation which is threatening their viability, the Confederation of Zimbabwe Industries (CZI) has said.

Zimbabwe’s month on month inflation hit 2.4% in December 2022 from 1.8% in the previous month due to the continued weakening of the dollar against major currencies.

This week, the local currency was trading at ZWL$732:US$1 from ZWL$705.41:US$1 last week on the foreign currency auction platform. In December the Zimbabwe dollar was trading at ZWL$671.44: US$1.

On the parallel market, the Zimbabwe dollar was trading between ZWL$1 100 and ZWL$1 200: US$1 from ZWL$700:US$1 in December.

The weakening of the Zimbabwe dollar has resulted in cost of raw materials rising, pushing up prices of goods beyond the purchasing power of many.

This has left many companies broke, judging by financial statements for the quarter to September 30, 2022, which the companies have been publishing over the past two weeks. Many have gone skint as they reported loss positions, largely due to inflationary pressures.

In its latest report published this week, CZI said inflation has been disastrous for local companies, with most of them failing to ratchet up production fast enough to meet demand.

“The sudden increase in month-on-month inflation for December (2.4%) is thus a cause of concern, as it could imply that new measures are needed,” part of the CZI report reads.

It continued: “Inflation in Zimbabwe is generally responsive to exchange rate depreciation, especially the parallel market rate. In December 2022, the parallel market rate started depreciating, which would be the most logical explanation for the resurging inflationary pressures.”

Rising inflation causes a reduction in the value of money, which can be translated as a decline in purchasing power over time.

Surging inflation rates results in companies passing on those costs to their customers, a move which will adversely affect aggregate demand as many will struggle to afford higher prices of goods and services.

Rising inflation also means that consumers have to pay more for the same goods and services.  Inflation raises prices, lowering purchasing power. Overtime, it increases the cost of living.

If it’s high enough, it hurts the economy, experts told Business Times.

While month on month inflation rate has travelled northwards to 2.4% in December, the annual inflation, however, fell to 243.8% in December from 255% in November, largely attributed to measures put in place by the government. However, multiple economists project the annual inflation to hit 400% this year.

Inflation reflects   the rate of increase in the prices of goods and services in an economy at any given time. In fact, the inflation rate represents the pace at which prices rise.  If inflation is falling, it doesn’t mean that prices are falling.

It just simply means that prices are not rising as quickly as they were in November 2022 at 255%, but increasing by an average rate of 243.8% in December 2022.

However, a slowdown of the inflation rate would be part of the Reserve Bank of Zimbabwe (RBZ)’s goal to keep prices stable.

The RBZ had wanted the inflation rate to increase at a pace of between 20% and 35% by December 2022. But, that target was missed.

It means, at the annual rate of 243.8% and month on month inflation of 2.4%, consumers are not comfortable spending their money due to curtailed purchasing power, adversely affecting aggregate demand.

The RBZ also hiked interest rates to 200% from 80% to make it pricey to borrow cash as well as taming inflation.

Apart from elevated prices of goods and services that fuelling high inflation in Zimbabwe, local companies are also battling a long list of constraints such as crippling power cuts, acute shortages of foreign currency, liquidity squeeze and currency volatility, among many other problems.

They are also feeling the heat of the geopolitical shock of the war in Ukraine, which is just putting an additional level of pressure, through a significantly disrupted fuel trade, exacerbating the situation.

“The worst is still to come, “an economist with a local bank, who requested not to be named, told Business Times in a terse response.

 

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