‘Tighten fiscal, monetary policies’

CLOUDINE MATOLA

Authorities should tighten both fiscal and monetary policies as inflation continues to accelerate despite assurances from the Reserve Bank of Zimbabwe governor, John Mushayavanhu that high prices of goods were a  temporary  transitional phenomenon that would dissipate quickly after the introduction of the new currency, the Zimbabwe Gold (ZiG, economists have warned.

Nonetheless, it is becoming more and more  evident  that  prices of goods and services continue to go up after Zimbabwe’s annual inflation for the month of April 2024  surged  to 57.5% , up from 55.3% in March, largely as a result of   the  continuous  volatility of the exchange rate .

In April, the monthly inflation was 2.9%,  shedding  2 percentage points  on the March inflation rates  of 4.9%.

However, as inflation refers to the rate at which prices are rising, a decline in inflation does not  indicate  a drop in prices,  rather, it indicates  a  2.9%  monthly increase in prices.

Rising inflation is weighing down Zimbabwe’s competitiveness against other regional countries amid indications that the high cost of doing business is causing goods and services to be very expensive.

Rampant inflation, analysts said, eliminates Zimbabwe’s chances of attaining a 3.5% economic growth in the face of rising production costs, thereby threatening business viability.

The United States of America dollar inflation was 3.2% in April.  Zimbabwe’s statistics agency, ZIMSTATS, said it will  begin  calculating  inflation  based on  ZiG  from May, when it will  have comparisons  for the month.

Additionally, ZIMSTATS will provide   blended inflation data.

Economist, Dr Prosper Chitambara, said  in order to stop the inflationary spiral, tighter fiscal and monetary policies are required.

“I think what’s needed is to address the inflationary spiral through, obviously, the tightening of the monetary policy, and also the tightening of the fiscal policy.

“So there’s a need for these two policies to complement each other. And once we’re able to ensure that monetary and fiscal discipline are sustained for a longer period of time, then I think we’ll begin to see inflation actually coming down, the inflation rate actually coming down. And when that happens, it means there will be more confidence by economic agents in the local currency, because inflation erodes the value of the currency, of any currency,” Dr Chitambara said.

He added: “So once we’re able to stabilise inflation to below 10%, it means  ZiG will be an effective store of value and even a medium of exchange. So there will be restoration of confidence by economic agents, which will also help in terms of sustaining the value of ZiG.

“So we need to ensure that we sustainably address the high inflation as a way of restoring confidence in the ZiG.”

According to Dr Chitambara, there is a significant correlation between exchange rate and inflation.

“So there is a positive relationship between the exchange rate depreciation and inflation. So any depreciation of the exchange rate creates inflationary pressures in any economy.

“I think the increase in inflation is reflecting or is a result largely of the depreciation of the local currency that we’ve experienced. Obviously, that puts pressure on the cost of doing business, on the cost of production, and ultimately on prices,” Chitambara said.

Persistence Gwanyanya, another economist, who is also a member of the Reserve Bank of Zimbabwe’s Monetary Policy Committee, concurred stating that there is a significant correlation between the rate of inflation and the exchange rate.

According to him, maintaining steady inflation rates requires managing the exchange rate.

“When we were  moving towards the introduction of new currency or the monetary policy statement,  the exchange rate in the formal system was depreciating, the interbank exchange rate was depreciating which is also reflective of the liberalisation or increased liberalisation of the exchange rate and this only shows you that there’s a strong relationship between inflation and exchange rate in Zimbabwe.

“So that is why we think if we manage the exchange rate with the ZiG, we are able to also stabilise inflation going forward,” Gwanyanya told Business Times.

On Tuesday of this week, Zimbabweans began transacting in ZiG notes and coins after all banks obtained local currency from the central bank and distributed it throughout the country.

Although, government is banking on ZiG, which is backed by gold and other minerals and foreign currency  reserves,  which appreciated against the greenback some few days after it was unveiled on April from ZiG13.56:US$1 to ZiG13.25:US$1, the local currency on Tuesday this week fell to U$13:43 on the official market.

On the parallel market, ZiG is now trading at between ZiG 23 and ZiG28 against the greenback.

Most companies are using the parallel market rate  to price their products, fueling a spike in prices of goods and services.

As a result, inflation also spiked.

According to the government,  ZiG  will end  market volatility.

Apparently, President Emmerson Mnangagwa’s administration has vowed to send a very powerful message  to the foreign currency  cartels , who have been wreaking havoc  on the economy  with their speculative  machinations.

In the past,  the forex dealers’ charges appeared to be quite light  as they were promptly granted bail even though they were causing  significant harm  to the economy.

Vice President Constantino Chiwenga declared last week that ZiG is here to stay and that anyone who violates Exchange Control laws will be sent to a prison.

He even advised currency merchants to arm themselves for battle.

Kenyan President William Ruto , who visited Zimbabwe last week, praised ZiG, calling it a daring step by the Zimbabwean government that should spur economic development.