LIVINGSTONE MARUFU/
RYAN CHIGOCHE
An economic meltdown is looming following the quickening of inflation amid indications that fiscal and monetary policies cannot deal with the challenges with elections beckoning.
Month on month inflation raced to 7% in February 2022 from 5.3% in January 2022 while annual inflation quickened to 66.1% in February from 60.6% in January.
The central bank projects annual inflation to be between 25 and 35% by the end of the year.
There are concerns of an absence of cohesion between the central bank and the Treasury as the government continued on a spending spree on infrastructure and agriculture at a time when the central bank was tightening money supply.
Economist Joseph Mverecha told Business Times that the recent fiscal and monetary policy measures are not likely to achieve much towards the desired currency and exchange rate stability and projects the monthly inflation to remain high at levels above 5%.
“As you can see the month on month inflation has moved by close to 2 percentage points between January 2022 and February 2022, as I always say with current policies, the month on month inflation will end the year way above 12% with annual inflation around 84.4%,” Mverecha said.
“More concretely, these new policy measures will neither lead to currency stability nor inflation deceleration. On the contrary we are likely to see an upward drift in headline inflation on the back of domestic prices that are linked to the widening parallel market premium.”
He said the biggest challenge with the current fiscal and monetary policies is “asymmetry and the underlying lack of consistency” which has been an underlying weakness of the macroeconomic policy framework.
The government recently allowed miners to pay half of their taxes and royalties in local currency in a bid to promote the use of the Zimbabwe dollar.
In his 2022 Monetary Policy Statement, central bank chief John Mangudya reduced the quarter-on-quarter reserve money target to 7.5% from 10% for the quarters ending March and June 2022. He said the bank will build foreign exchange reserves to provide the necessary support for the local currency to enhance its attractiveness through setting aside 5% of the foreign exchange available for the auction system.
Mverecha says the measures have
limited chances of achieving internal and external balance, a definite prerequisite for achieving currency stability by dissipating inflationary pressures and getting the economy on course towards low and stable inflation.
“In the event that the current policy scenario is sustained with no variation, the economy wide implications are summarised below: Sustained pressure on the exchange rate; Growing currency local currency disuse; increasing recourse to the US$ and rising inflation,” he said.
Mverecha said an optimal monetary policy framework must ensure that the interest and exchange rate policy are designed and synchronised so as to achieve financial markets equilibrium in terms of both the foreign exchange and domestic money market.
Analysts say the tightening of reserve money targeting as announced in the MPS is welcome, but if this had been implemented 12 months ago, the outlook on exchange rate and currency vulnerability would be materially different.
Quantitative tightening and exchange rate flexibility must be an integral part of an effective monetary policy framework, analysts say.
Money growth and nominal prices always move 1:1.
Economist Gift Mugano told this publication that with current sharp contrasts between the central bank and the Treasury, inflation and exchange rate will lead to closure of more companies and push poverty levels to above 50%.
“As long as the government doesn’t cut subsidies on agriculture and continue with short term financing of infrastructure the inflation and exchange rate will continue to wreak havoc.
“If the authorities continue with this trend the annual inflation will be at 100% by June this year and this will lead to capital erosion for companies and eventually to closure because there will be no aggregate demand for the goods as 49% [7.4m people] of the population is in extreme poverty levels,” Mugano said.
He said the exchange rate disparities will lead to compression of capital in companies causing the firms to pay workers pittance thereby making them poorer by each month as there will be no one to buy goods.
“With the current pace, the whole system will crash by June,” Mugano said.
In Zimbabwe, due to inflation expectations, and the related frontloading and replacement pricing, there is no difference between the short run and long run – all price movements occur simultaneously and indexed to the parallel market.
Speculative behaviour fuelled by uncertainty, compounds the problem and the exchange rate adjusts in response to any monetary stimuli.
Adjusting the official exchange to parity with reserve money growth since August 2020 means that the exchange rate should have been adjusted to ZWL$187.67 per US$, Mugano said.
Experts said maintaining reserve money quarterly targets of 20% gave birth to the inflation resurgence.
“If authorities had tightened in August/September 2020 by targeting quarterly reserve money growth of 7.5%, as they have now done, the following would likely have happened: the reserve money would have increased to ZWL$16.53bn in 12 months, annual reserve money growth would have been 33.5% and there would be no parallel market pressure,” Mugano said.
Experts say the government has to buttress the Zimbabwe dollar to prevent the collapse of the local currency and grow the economy and jobs.
“The currency volatility and exchange rate pressure has persisted for a long time, and if not immediately reversed through appropriate policies, local currency vulnerability will remain elevated, with possible currency loss/ increasing disuse,” an economist who preferred anonymity said.
“For as long as the exchange rate remains on a “crawling peg”, even after further reserve money tightening, headline inflation persistence is projected to be above 80% by December 2022.”
Mangudya said the central bank will remain steadfast on curbing inflation through the tightening of the broad money supply.
“We expect the inflation for 2022 expected to end the year between 25% and 35% on the back of the reduced money supply growth to stem inflationary pressures and anchor inflation and exchange rate expectations,” Mangudya said.
“The interest rates to remain high to curb speculative borrowing, will also put measures to preserve the value of the local currency and encourage its broader use in the economy.”
This week the Zimbabwe dollar was trading at ZWL$128:US$1 at the formal market. But, in the black market, the local dollar was trading at ZWL$250 to the greenback.
Mugano believes the government would print unproductive money to fund campaigns as elections draw closer.
Zimbabwe is holding a by-election this month. The country will also have general elections next year.
“There is a huge likelihood of unproductive money creation since we are getting into an election season and it is likely to affect economic functionalities as resources will not be evenly distributed to other key sectors of the economy.
“As at September 30 2021, the government had already spent over 171% of its 2021 budget allocation, it’s not surprising that by the year’s end the authorities would have spent over 200%.
“The government has been campaigning using populist programmes like Pfumvudza and Command Agriculture to reach out to people and it’s not a coincidence that banks have started lending, a thing which they have not been doing in the past years.
“That’s where we start to see high non-performing loans after the elections, the politicians will do this to garner support at the expense of the economy,” Mugano said.
“Now the government is using short term financial instruments which are expensive to fund road construction which is impossible as projects of such magnitude need long term instruments like bonds.
“If we analyse our capital expenditure was usually at 10% but with infrastructure and agriculture projects, the government has pushed it to above 34% which is very abnormal for an economy like ours,” Mugano said.
Economist Moses Chundu described the RBZ inflation target as nothing but ‘’wishes’’ which the government was never going to achieve due to unplanned spending like the recent civil servants package.
“The threat to achieve the targets remains the lack of discipline in controlling money supply, something that is natural in a pre-election period given the magnitude of discretionary spending. Already we are hearing of the government’s hefty package for civil servants which sounded ad hoc and unbudgeted; these are the things that render targets meaningless,” Chundu said.
“What’s happening in Ukraine will be another significant external shock with a huge bearing on inflation not just in Zimbabwe but globally.”
