LIVINGSTONE MARUFU
Local companies have dumped the blended inflation rate on reporting their financials amid fears that it distorts the real value of firms’ balance sheets.
Zimbabwe adopted blending inflation early this year saying it was in line with what is happening on the ground, as the United States dollar became the dominant currency in transactions.
Accountants have engaged the government over the disbandment of the blended inflation due to its failure to show the ZWL$ inflation on the ground.
In a trading update for the first quarter that ended March 31, 2023, Fidelity Life Assurance company secretary Ruvimbo Chidora said there was a need to separate US$ inflation and ZWL$ to come up with true inflation rates.
“The adoption of the blended Consumer Price Indices [CPI] statistics may not be appropriate for financial reporting purposes and the full impact shall be assessed and published in the group’s half-year interim reporting,” Chidora said.
“… The spike in ZWL prices is not a true reflection of the blended inflation rate. In the short term, the ZWL$ is expected to remain under pressure on account of election-related spending and the ongoing infrastructure development projects.”
She said the use of foreign currency for local transactions was therefore expected to gain more prominence as the year progresses.
Masimba Holdings company secretary Pearl Mutiti said the blended inflation is unsustainable.
“The use of multiple and ‘uncontrollable’ alternative market exchange rates in the economy has contributed to the deterioration of inflation levels which continues the status quo and has the potential of threatening the viability of long-term infrastructure developments,” she said.
AfDIS chairman Matts Valela said the blended directors have estimated CPIs for these two months due to the absence of official general price indices in February and March 2023 following the promulgation of Statutory Instrument 27 of 2023 on 3 March 2023.
“This is an area of significant estimation uncertainty and relevant disclosures have been made to the complete set of the financial statements,” he said.
The blended rate combines US$ and ZWL$ inflation and is of little use in understanding pure ZWL$ or US$ inflation.
Delta chairman Sternford Moyo said the movement in ZWL inflation does not exactly track exchange rates; this seems to be the general trend over time.
“The group adopted the use of the expert-derived index and the impact of change in the conversion factor if the Index based on the official exchange rate is used instead of the expert-derived index.
“Impact of change in the conversion factor if the Index based on the internal exchange rate is used instead of the expert-derived index,” Moyo said.
During the first quarter, there was a significant decline in annual inflation, with figures dropping to 87.6% at the end of the period, compared to 243.76% in December 2022.
This can be attributed to the implementation of the blended inflation metrics combining the US$ and ZWL$ currencies.
In a trading update, First Mutual Properties company secretary Dulcie Kandwe said despite the notable decrease in inflation on the blended CPI, the local currency continued to depreciate against the US$ as foreign currency exchange rates fell by 35.9% using the Dutch auction interbank exchange rate and 35.3% on the alternative market.
“Businesses have been noted to prefer settling transactions using the greenback rather than the local currency, leading to an increase in the use of the US$ across the market,” she said.
The development comes as the Confederation of Zimbabwe Industries (CZI) said blended annual inflation still depicted a positive story.
“This is quite a pronounced decline, which would have been welcome news indeed if events on the ground were not showing an opposite picture,” CZI said.
CZI said there are some business sectors where the ZWL$ predominantly defines their revenue despite the ZWL$ being assigned a lower weight in blended inflation.
CZI survey results show that on average, only 17.6% of total revenue in 2022 was in US$ for compliant formal retail supermarkets and wholesalers.
The dominance of the ZWL$ in total revenue is also true concerning formal manufacturing sector firms who are still primarily using formal retail and wholesalers as their main distribution channel, as the retailers and wholesalers largely pay them in ZWL$.
“This means that there is a significant business segment where blended inflation is of not much use as they are still primarily interested in how the ZWL$ inflation has been impacting their businesses, which would require them to input the ZWL$ inflation in their business decisions,” the largest business grouping said.
“The Total Consumption Line (TCL) is still being reported in ZWL$. Thus, TCL inflation should be close to the actual inflation, as it also represents a basket of products that face the same conditions as the total consumer basket for inflation. The month-on-month change in the TCL for April 2023 was about 11%, which is very high for a change within only one month,” CZI said.
Businesses said the annual change in TCL was about 191%.
“Based on our forecast, which closely resembles the actual inflation based on historical figures, we estimate that the annual ZWL$ inflation for April 2022 was about 174%.
“Our model also confirms that the month-on-month inflation rate for April 2023 was indeed very high, being also in double-digit levels as the TCL inflation at about 10%,” the business member organisation said.
