In Part One we covered what everyone who has been exposed to the subject of economics, has been trained to regard as the major cause of inflation — that is a supply and demand mismatch.
In this part, let us continue with this aspect notwithstanding the criticality of the others. In doing so, we find that one of Zimbabwe’s major challenges has been her ailing manufacturing industries.
Addition to capacity challenges, this industry has, since UDI, fallen behind all the developed and emerging economies on the technological front in spite of having been closely associated with them during colonial days.
This is a challenge that has dealt a heavy blow to local product quality thus making it difficult for the country to produce exportable products. This challenge speaks to a lack of capital in machinery and cash in the economy — itself, a symptom of an ailing economy.
However, in the case of Zimbabwe — Rhodesia then — when it came to technological advancement, the country ended up also lagging behind the West from which it had derived its industrial systems. But nonetheless, at that time, all its products were functional for local purposes. That was a condition that helped in stabilising the local currency — a currency that was not accepted outside the country anyway.
So in sum, Zimbabwe’s current major economic challenge has resulted in a chronically ailing industrial system. Add corruption to this challenge, and what you have is a really poisonous concoction in the economy.
In order to better appreciate the consequences of this (corruption)challenge as it impacts on the country’s inflation problem, here is a case from an article dated 4-10 November 2022, in this paper in which the press interviewed Justice Loice Matanda-Moyo, the current head of the Zimbabwe Anti-Corruption 28 October to 3 November 2022 “(…) The private sector is “very guilty” of corruption in Zimbabwe. (…)They also bribe the public sector taking advantage (sic) that the public service salaries are low. (…)You look for something that is bought in South Africa for R5, that thing is sold in Zimbabwe for US$100 (that is 320 times the original price) and you wonder what pricing system is being used (…)”.
She also says the companies do not declare imported goods to customs. They are also not paying duty and tax, and (are) also indulging all manner of malpractices.
Here, she also refers to another case in which Parliament had to revoke the purchase of 173 laptops for US$ 1,6 million — that is US$ 9000 — each after objection from Treasury. (These are products that normally cost as low as US$476,00 or so each!)
She goes on to aver that the National Prosecuting Authority is not carrying out its mandate satisfactorily by its ‘catch and release approach’, citing the cases of three well connected individuals — that is Charles Undenge, Prisca Mupfumira and Wicknel Chivhayo — who were arrested for corruption but have not been prosecuted.
In the same article, economist (Professor) Gift Mugano says; “(…) Policy makers must take corruption seriously the way they are taking the anti-sanctions drive(…)” “(…) But we could have used the resources to bust sanctions if we were careful and proactive in terms of corruption”.
At this juncture, let us try and make some pertinent deductions from the interactive communications among (the) stakeholders regarding Zimbabwe’s inflation challenge as expressed in the last six paragraphs of Part Two of this piece.
Here they are: The mentality and/or attitude to bust sanctions — itself a key strategy that Rhodesia applied — is currently not in us as (black) Zimbabweans. What makes this aspect of the matter more compelling than otherwise, is the current impact of economic sanctions that the US government has imposed on no less than 100 countries — Zimbabwe among them — throughout the world.
In this regard, The Economist, one of the world’s leading economic magazines, has been tracking this matter for quite some time now. One issue of the paper dated April 16, 2022 has an article titled; “Tracking ships at sea can help catch sanctions busters”, (economist.com). According to another article in one issue of the same paper, there is now a thriving sanctions busting industry operating mainly on the high seas of the world.
This shows us two things: Affected nations are not sitting on their laurels over the matter. This situation shows how critical and damaging these sanctions have been to their victims to date. Naturally, here some countries will succeed while others will fail.
As regards taxes, the now prevalent habit of tax evasion — itself a sign of irresponsibility on the part of the local business person — is causing poverty in the country, starting with government departments.
And in the current circumstances of heightened corruption, price rises in this country are spontaneous and can in such circumstances, emanate from any direction.
This is one of the reasons for price and exchange rate instability in the economy.
Under normal circumstances, both inflation and interest rates interact in a manner that (appears to be) quite straight forward. In that case, if you raise interest rates you (are supposed to) discourage borrowing and spending in the economy.
This action is supposed to cool the economy down, in the process checking inflation.
But then, when this happens, the economy slows down towards stagflation. But since the latter is undesirable, the Central Bank then lowers interest rates to reverse the process back to the growth mode.
So clearly, this is a strategy in which the latter should be constantly trying to keep the system in (a state of) balance. This is the method used by central banks — now led by the Federal Bank of America — affectionately known as the Fed — everywhere else in the world anyway.
But then, such a strategy makes certain pertinent assumptions. The major one of these is that all the components of the economy — particularly the productive ones — are functioning efficiently and effectively.
However, on the other hand, the appropriateness and relevance of the components of an economic system largely depend on its composite structure, which itself, becomes critical in dealing with the phenomenon of inflation. So given this fact, we find that (the) developed economies are the ones that currently possess the capacity to withstand the negative forces associated with the challenges of supply and demand of goods and services — the major cause of inflation.
Such economies possess all those vital components that have been built into them as they have been developing over the years; these being land and other forms of capital; labour and technology. In this case, three of the most critical forms — the ones we currently lack in this country — are technologically up to date machinery, coupled with a skilled workforce, and working operating capital.
In the former economies, if working capital is not available in sufficient amounts, they print some and inject it into the economy — a strategy known as quantitative easing — QE in short.
But in an economy such as the Zimbabwean one, the story is quite different. Here, it is not difficult to envisage what an increase of money supply will cause. Sure inflation.
In this country, in most cases, this process is triggered by voluntary, and sometimes involuntary forces. For example, even though the veracity of such allegations can be debated, the raising of campaign funds by ZANU(PF) has sometimes been accused of raising money supply, thereby causing inflation in the economy.
In the same respect, below is another statement in the 11-17 November 2022 issue of this paper in an article titled; Weakening local currency drives money supply to 400pc — that throws some light on how this happens: “A weakening local currency against the US dollar has driven year on year broad money supply by 388,75 percent as at August 31,2022. (…) The RBZ in its latest monthly economic review, said the increase in broad money was largely driven by the exchange rate revaluations over the year”.
This is a typical case of a negative feedback mechanism and/or system whose trigger can, in our case, be difficult to pin down since it results in vicious cycles in the monetary realm.
In the said case, a weak currency is alleged to have led to an increased money supply (and) a heightened money supply is claimed to have led to a weakening of the same local currency. This kind of problem — that is quite difficult to solve — takes us back to our question: If you want to cure this sort of malady where do you start from?
To most of us, because we are not willing to think outside the box, there is no simple answer here. But those in the know will tell you that you solve the challenge by first fixing the structure of the economy.
At this point it may help us to relook into the OECD environment for comparison. In that environment, if more money is printed and/or created and injected into the economy, it also raises inflation there in — but not to dysfunctional levels.
The reason why an increase in money supply in those economies does not cause havoc is the strength of their productive sectors. One factor that is critical in those environs is that of the raw material supply chain(s).
For this reason, Joe Biden the current US president, made a strenuous effort emphasising this fact at the onset of the Covid19 pandemic 2019 — not long after becoming president of that country.
From this elucidation, we can easily see that under our conditions, when it rears its ugly head, inflation becomes quite difficult to control.
This situation is further exacerbated by the disagreement that has now become endemic between the RBZ — the manager of interest rates — and the industrialists — concerning how to manage this condition.
This friction between these two is currently showing up in a rather exasperating way. For example, according to the article (Dr.) John Mangundya the RBZ governor said; “(…) The RBZ will not bow to pressure for an immediate downward review of its punitive interest rate regime until it sees inflation on a “durable” decline trajectory(…)”.
According to the paper, “(…)The governor’s remarks came amid shrill calls from various key sectors of the economy including industry, banking and agriculture for the bank to lower its 200percent bank policy rate(…)”.
Mangundya went on to say that, “(…) The bank’s monetary policy committee noted that the increase in inflation was undermining consumer demand due to diminishing purchasing power as well as confidence in citizens(…)”.
“(…) Inflation in Zimbabwe has largely tracked the depreciation of the domestic currency which was reintroduced in 2019 after a 10-year hyperinflation induced hiatus at Z$2,5/ 1$US, but now exchanges around $850/US$1”, continued the article.
In another related case, here is a statement in the Business Weekly issue dated 4-10 November 2022, that throws more light on the way other economies normally deal with the challenge of interest rates and inflation.
This is an article that appreciates the impact of the two on economic growth.
“The South African central bank said it will continue using interest rates (current repo rate is at 6,5percent) to curb inflation and called for its mandate to explicitly include promoting economic growth and creating jobs by saying monetary policy already targets those indicators (…)”
The following can be deduced from these excerpts. The Zimbabwean monetary authorities seem to be fixated on keeping the interest rate high, believing that this stance will enable them to control inflation. In this case, they would rather let the economy shrink than leave inflation to ‘shoot up’. So here they are sacrificing economic growth for the control of inflation. The final outcome of such a stance is anybody’s guess. But because of the current weak structure of the economy, it is logical to assume that economic stagnation and/or shrinkage is the likely result of such a stance.
Apparently, on realising this dilemma the RBZ governor has tried to respond to the situation by arguing that the rates for agriculture has been adjusted to 100 percent and so-according to his thinking-the situation will be manageable in that industry.
But considered from a practical perspective, the question that crops up is: Since when have such (high) rates been a practical proposition in any industry-agriculture included?
This is because in that case, in order to remain viable, the farmer will be expecting profits of well over 100 percent. But then, if realised, this will be another, almost certain, trigger of high prices and consequent inflation. So again, this situation thrusts us into that position where we face another dilemma.
Meanwhile, the manufacturers and the banks can see that the continued state of high interest rates is going to harm the economy.
This is why they are appealing to the Central Bank to lower the rates. But here the response of the latter tells its own story.
At this point, we have to remember that the private sector-of which the industrialists are members — is always blaming the authorities for raising the money supply. Following on this line of thinking, they go on to argue that this is what is causing the incessant rise in inflation in the economy.
Clifford Shambare is an economist who has qualifications in agriculture. He is a practising farmer and a business consultant and contacted at [email protected]