PHILLIMON MHLANGA
The government plans to crack down on local currency dealers and businesses as it moves to halt galloping prices, Business Times can report.
Zimbabwe, once the envy of the Southern Africa region, is experiencing the ravages of soaring hyperinflation, a drop in GDP estimated to be negative 6.5% this year, shortages of foreign currency, fuel, water, electricity, jobs and other essentials, among other severe challenges, which have escalated since October last year when President Emmerson Mnangagwa’s new cabinet hit the road crawling, instead of running.
The deteriorating economy has forced businesses to increase prices of their goods and services, resulting in hyperinflation whose consequences have been a huge challenge for the ailing economy to crack.
This week, Finance Minister Mthuli Ncube told Business Times that it was time for a crackdown to ensure currency stability. His remarks reaffirmed an earlier statement by President Mnangagwa who also warned businesses over the continuous price increases.
He warned that the price surge would have devastating consequences on the economy.
“The [currency] level is good but we now need to de-link it from rising prices,” Ncube said. “That’s what it has been like, where retailers are using forward pricing strategy, where they look at replacement cost instead of current costs.
“Going forward, we are dealing with the cash crisis by introducing physical cash into the market. In other words, we will be swapping RTGS for cash to contain prices going forward. New currency notes are coming in the fullness of time.”
Although Ncube admitted the economy would achieve a negative 6.5 percent growth due to shocks induced by the severe drought and the impact of electricity shortages, he projected an economic rebound next year, adding that competitiveness had been restored in the currency market.
“Yes, we have suffered severe shocks this year that impacted negatively on our economy. But we expect a very strong economic rebound in 2020 and beyond,” he said. “Next year we expect growth of 4.6%.
Export earnings are now 15 times stronger.
Zimbabwe is now cheaper than the rest in the Southern African region in terms of manufacturing. We need to take advantage of that.”
The currency crackdown comes at a time when the nation’s economy has plunged into another dose of hyperinflation, a decade after it exorcised the ghost of galloping prices.
Hyperinflation erodes the value of any currency and can render it worthless. Its effects on the economy are seen in sapping tax revenues, rising unemployment rate, and an increase in the cost of living. Citizens will lose their life time savings as cash becomes worthless, meaning the economy falls apart.
In June, the government abolished the multi-currency regime that had been in place since February 2009 and restored the Zimbabwean dollar as the sole legal tender. Since then, prices of goods and services have gone up and up and up, as rising inflation has eroded the value of salaries and wages.
An employee who used to receive 3,000 bond notes a month (which was equivalent of US$3,000 when the rate was 1:1) is now receiving US$139.53. The miracle is how Zimbabweans are surviving on such eroded wages and salaries when everything has gone up except wages and salaries for the majority of employees.
The government has, however, suspended the publication of annual inflation figures until February next year after it reached 176% in June.
Experts say the economy has slipped into hyperinflation.
It is estimated that annual inflation was at about 300% in August, according to independent local economists who accurately measure it using the consumer price index. Some measure it with precision applying the purchasing power parity.
Steve Hanke, the American economics professor with a bias for Zimbabwe, projects annual inflation to reach 1,000% by the end of the year.
In its latest pronouncement, issued last week, the Public Accountants and Auditors Board (PAAB), which regulates the accountancy profession in Zimbabwe, says the factors and characteristics to apply the financial reporting in hyperinflationary economies standards (International
Accounting Standards (IAS) 29, have been met.
“Pursuant to the provisions of section 44(2), on 1 March 2019, the Public Accountants and Auditors Board made the Public Accountants and Auditors (Prescription of International Standards Regulations 2019, Statutory Instrument 41 of 2019,” PAAB said.
“In terms of section 4(1) as read with Schedule 1 of these regulations, the Board prescribed that the International Financial Reporting Standards (IFRS), which includes the standard to which this pronouncement relates, shall be applicable in Zimbabwe,” PAAB added.
Inflation statistics in Zimbabwe have been galloping, triggering considerations over the application of IAS 29-Hyperinflation (IAS 29) to the financial results.
IAS 29 considers several indicators of the existence of hyperinflation, such as when the general population prefers to keep their wealth in non-monetary assets or in a relatively stable foreign currency, where amounts of local currency held are immediately invested to maintain purchasing power, and the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency.
It is applicable when prices may be quoted in a relatively stable currency, sales and purchases on credit take place at prices that compensate for expected loss of purchasing power during the credit period, even if the period is short, when interest rates, wages and prices are linked to a price index and the cumulative inflation rate over three years is approaching, or exceeding 100%.
“…PAAB can advise that there is broad market consensus within the accounting and auditing professions that the factors and characteristics to apply the Financial Reporting in hyperinflationary Economies Standard (IAS 29), in Zimbabwe have been met,” PAAB said.
It recommended that preparers exercise professional judgement in considering the presentation of historical financial information as supplementary information alongside the primary IFRS financial statements which would be inflation-adjusted in terms of the requirements of IAS 29 in light of multiple stakeholders such as tax authorities and sector regulators.
“Where historical financial information is presented alongside IFRS financial statements adjusted for IAS 29, it must be made quite clear which represents the primary financial statements,” PAAB said.
This covers the preparation and presentation of financial statements of entities operating in Zimbabwe for the financial periods ended on or after 1 July 2019.
The effects of hyperinflation are extreme; meaning the Zimbabwean dollar, recently introduced becomes almost entirely worthless shortly after one receives it.
There is no point in saving as the value of savings is wiped out, meaning little is invested or reinvested. There is also no point in lending money as interest and capital repayments soon become valueless.
Instead there is capital flight, as ordinary people are desperate to get their money out of a worthless currency zone. What people receive in pay does not keep up with the ever-increasing prices of goods.
Analysts say Finance Minister Ncube’s tough measures to stabilise a wrecked economy have made things worse, squeezing hard-pressed Zimbabweans.
There has been anger against his austerity measures and “textbook” economics ever since he came into office. Some people, in fact, blame him for triggering the current sad situation with his “textbook economics” that appears to have no context for social and political correctness.
The government has said the country is open for business and is vigorously pursuing re-engagement with the international community. But the current state of the economy is making things difficult to attract investors.
“It means more problems, uncertainty, more instability, more anxiety, more fears, more price increases, higher electricity prices, more pressure from fuel price increases and more unemployment,” says the economist John Robertson.
“If you are lucky to get a job, it is likely to be insecure and this keeps many people awake at night. There will be no investment coming into the country because investors will take a back seat. That’s a critical problem because employment depends on investment. There will be momentum in company closures.”
It sounds like the apocalypse, but if you think there is a way out, the stockbroker Itai Chirume adds more groom by saying it will be tough for local companies to restate their financial numbers to indicate hyperinflation.
“The problem is the appropriate rate to use, now that ZimStat has stopped publishing annual inflation rates. It means companies will grapple with which figure to rely on. It’s going to be a huge problem,” Chirume forecasts.
