The complexity of Zimbabwe’s rising inflation

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EDITORIAL

High Court judge, Justice Happias Zhou, yesterday set aside Statutory Instrument 205/2018 which gave legal effect to the Intermediated Money Transfer Tax which is commonly known as the “2% Tax” on all electronic transactions.

The Treasury introduced the tax last October to widen rev­enue streams and narrow fiscal deficits. Years of fiscal indiscipline had left the government in a precarious position where it struggled to finance capital ex­penditure and fund social spending. As of January this year, the government was collecting nearly $100m a month from this tax.

The introduction of the tax immediately attracted public outrage after prices of basic goods and services shot up the roof, and panic buying ensued across the country.

The great commotion that followed the introduction of this tax has seen inflation going out of control (forcing the RBZ to raise interest rates to 70% last Friday), the exchange rate going haywire (compelling the government to dispense with the one-to-one parity rate between the US dollar and the bond note, and finally outlawing the multicurrency regime), in fact all the economic misery suffered by Zimbabweans in the past one year can be at­tributed to this “2% Tax”.

At the time the tax was introduced last October, the authorities said the revenue collected from the tax would be vital in upgrading the country’s infrastructure. There were few takers on this narrative. Zimbabwean man, Mfundo Mlilo through his lawyer Tendai Biti, challenged the lawfulness of the statutory instrument, which was widely criticised for being inflationary.

Zimbabwe’s annual inflation for June this year reached 175.66%, the highest in 10 years and this has piled pressure on the authorities to do some­thing to tame the soaring inflation. As prices rose, so did political tempera­tures. The government, which introduced austerity measures in its 2019 Na­tional Budget, was left with limited fiscal space when civil servants pushed for a salary hike.

The High Court ruling yesterday came nearly a week after the Reserve Bank of Zimbabwe governor John Mangudya announced his Monetary Policy Statement, which came at a time the economy was facing inflation­ary pressures emanating from a litany of factors such as the lagged effects of the monetisation of past fiscal deficits, market correction, spiralling parallel exchange rate premiums, and speculative pricing.

Premiums on the exchange rate on bank notes and electronic money have been widening, reflecting an increased demand for bank notes. The central bank says it would drip-feed new notes into the economy to ease cash short­ages on the market. To arrest rising inflation, the RBZ, has introduced, among other measures, high interest rates which, it hopes, will curtail specu­lative borrowing to buy foreign exchange on the parallel market and a flexible exchange rate to assist in absorbing external shocks and ensuring that the external position is sustainable.

While these measures are key in containing inflation, Zimbabwe contin­ues to face structural deficiencies and headwinds which stifle domestic pro­duction. The government’s surprise decision to abandon the multicurrency system, which was introduced to contain hyperinflation in 2009, has had an enormous effect on balance sheets of most local companies – primarily those with no foreign shareholder support. The stimulation of domestic output will help in containing the country’s import bill as well as create jobs.

Zimbabwe cannot turn around its economic fortunes when local industry is on its knees.