eBusiness Weekly
Clifford Shambare
Part One.
Inflation is an important factor in matters of money and trade, largely because it causes loss of value and consequently, the purchasing power of money. This is a phenomenon that started in
Western Europe in the second half of the 15 th century to the second half of the 17 th century. During that period, ‘that region experienced a major inflationary cycle referred to as the Price
Revolution with prices on average rising perhaps six fold over 150 years’. Currently, we are back to a period of rising inflation emanating from the Ukraine war. As a result, the world’s top economy, America, has already sounded its concern for the situation. To illustrate this concern, here is a quote from Forbes Advisor article titled; Why is Inflation So
High?, dated 11, October 2022, “The US Labour Department reported that the September price index rose 8.2 percent over the prior 12 months, higher than what experts had predicted”.
Inflation itself, is a feared phenomenon because, when it reaches what is referred to as hyperinflation state, it has the potential to devastate the whole world’s economy.
So, in order to keep it in check, inflation is normally recognised and taken care of through the field of finance and accounting. In that case, there is what is called the real and nominal value of money.
In the same case real value is the value that pertains to a condition of low or even, no inflation. But in practice, a certain level of inflation is said to be desirable since it is said to stimulate economic growth. As a result, in the leading economies of the world, they have, over the years, kept it around 2.5 percent or so.
But like all such phenomena, inflation can move into negative territory during the periods of low industrial and economic activity like it did in the EU regions between 2013 and 2014. For example, year on year inflation was -0.2 in December 2014.
By the same token, it can shoot up to dysfunctional levels, as it is threatening to do now in the economic region (see below).
When inflation strikes, it leads to a state of money illusion, a phenomenon that refers to the state [of mind] of the investor. This is a term that literally means that the owner of the monetary asset may think that they are well endowed financially when in fact, they are not. So in such a case, the only way to determine the actual value of the monetary asset is through adjusting the financial figures so obtained for inflation by taking out the latter. As can be expected, perhaps because of the (negative) events that have been taking place in the accounting and financial reporting field in the past, today there is international legislation that has been promulgated to take care of matters in this field.
One of the major ones of such legislation are the International Financial Reporting Standards (IFRS) that replaced the International Accounting Standards (IAS) — a financial reporting requirement for entities whose functional currency is the currency of hyper-inflationary economies. The latter – that replaced the former in 2001-fosters greater corporate transparency in the world financial and economic arena.
A good example of such challenges concerns the cases of financial reports for AT &T and Exxon as some of the examples that have been cited regarding this challenge. (As it turns out, 1982 was the end year of the 1973 to 1982 hyperinflation period in the world economy (see below)). In those two cases there was an after adjustment loss of US$ 5, 6 billion for an unspecified loss from an original unadjusted profit of US$ 4,2 billion for Exxon. Interestingly, in Management of Investment, by Jack Clark Francis, the book from which this information has been extracted, it was mentioned that, “Since the accounting profession has never required inflation adjusted reports, AT&T and Exxon ‘understandably’ eliminated their inflation adjusted financial statements in the years that followed”. One rather interesting fact to note here, however, concerns the above statement that: “The accounting profession has never required inflation adjusted reports”. The issue here is the time factor involved. While that statement was made in 1982, the legislation only came on the scene some 19 years later in 2001. Here it cannot be amiss to deduce that cases such as the Enron scandal that occurred in 2001 — the same year of the setting up of IFRS — could have contributed to such developments.
This corporate financing [reporting] requirement is understandable when one considers that — whenever they are allowed to develop unchecked — such negativities nearly always result in a loss of value of some sort — a loss that finally manifests itself through the stock markets and thence, to the world economy level. In an environment such as the current Zimbabwean one, inflation adjustment is a must.
However,it is difficult to carry it out in this case because of the rapid rate at which inflation is growing. Zimbabwe’s inflation rate 2021-2022. Zambia’s Inflation rate Jan 2022- October 2022.For example, currently, Zimbabwe’s inflation rate is 280 percent — what the experts refer to as a ‘triple digit’ rate. In this case, quarterly reporting may be necessary.
In order to have a better picture of the current Zimbabwean case, it becomes necessary to place the country in the African context. Here let us consider the top 10 of those African economies with the highest interest rates as of 28 September 2022: Sudan 245,1 percent, Zimbabwe 200percent, Ethiopia 34,5 percent, Angola 23.9 percent, Sierra Leone17,3 percent, Ghana 16.3percent, Nigeria 16,1 percent, South Sudan 16.0 percent, Zambia 15,7 percent, Sao Tome and
Principe 14,5 percent.
Zimbabwe’s lending interest rates 10/2021—6/22.
Zambia’s interest rates 2013-2020
Rather interestingly, during the same period, Zambia’s inflation rate — already much lower than Zimbabwe’s — has been falling from a high of just above 19 percent to approximately 8 percent(see graph elsewhere in this article). Incidentally, Zambia’s inflation rate is almost running parallel to that of the OECDeconomies. Interestingly, however, this state of affairs may neither be coincidental — nor even accidental (see below).
Since the conventional practice involves raising interest rates in order to control inflation, the RBZ has been raising interest rates to try to control the runaway inflation. However, the sudden rise in this (interest) rate in July 2022, as indicated by this graph, seems to indicate a reactive behaviour on the bank’s part. But whatever the case may be, the bank’s action appears to be working, with result that inflation has been coming down from 280 percent in the month of August to 265 percent in the month of October 2022.
Whether the bank will be able to sustain this trend, or not, will depend on cooperation from the private sector. As regards interest rates, the following are the statistics for the same countries as of June 2022: Zimbabwe 200 percent; Sudan 24.9 percent; Ghana 24,5 percent; Angola 19.5 percent; Malawi 18 percent; Mozambique 17,25 percent; Sierra Leone 17,0 percent; Nigeria 15,5 percent; Liberia 15,0 percent; and Egypt 13,25 percent.
So, these figures show how badly Zimbabwe’s economy appears to be performing compared to other African economies. But then, why is this so? You may be asking.
The way I see the matter, there are a few pertinent reasons, that may be subtle to some of us — why this is so. Here, to me, ineptitude, greed and corruption top the list. Of the three, ineptitude is the most difficult to pin down in practice but it has a serious impact on the whole system.
On looking critically into this aspect of the matter, we find that historically, indigenous Zimbabweans have not been directly involved in running manufacturing businesses. This situation is the complete opposite to the white Zimbabweans (see below).
So it means that the exit of the latter after the land reform programme of 2000, has now become our bane. But then, from this stage on, this becomes a political issue — an issue that is loaded with many bad memories and bitterness among a sizeable proportion of Zimbabweans — especially the older folk.
On the other hand, economic sanctions are also contributing to the challenge. This is in spite of some Zimbabwean quarters arguing that, either there are no sanctions or the same are targeted.
But if one is aware that these sanctions are based in the multilateral finance institutions where international interest rates on loans are set and controlled, they cannot wish away this fact.
That said, in Zimbabwe’s case, there seems to be a hidden irony. The Zimbabwean economy is more exposed to inflation than the other African economies because the indigenes — the ones most susceptible to the said sanctions — are trying to take it over from the original owners, the colonists.
In such circumstances, the structure of an economy becomes critical. For example, if an economy’s structure is rudimentary, and depending on commodities as is the case with most
African economies — Zimbabwe included — it suffers from certain pertinent weaknesses that are peculiar to such a level of development.
But then, in the same circumstances, most African countries seem to be immune to the impact of rising interest rates on their economies.
This is largely because they get their foreign currencies from commodity exports. And because, under such circumstances, those commodities are usually extracted by foreign multinationals using their own capital which they are able to borrow at relatively low interest rates from their capital markets, the role played by the indigenes in such economies is minimal. As a result, those economies remain immune — or cushioned — from the penalties emanating from the world’s major lending institutions — a situation that Zimbabwe finds herself in now. Furthermore, because of the said sanctions, Zimbabwe is not considered for debt forgiveness — a practice whose result is, in a way a form of financial grant.
Moreover, these same multinational corporations have access to cheap capital, so while operating in Zimbabwe, they face different challenges — if any — to those of local investors. This is a situation that virtually makes monopolies (out of) the former. This may explain why some of them have been fingered in the activities of price manipulation in the country from time to time.
But here, there is another irony. Since indigenous Zimbabweans had inherited an economy with a high complexity index in which there was a strong manufacturing industry — in their current endeavour to resuscitate the country’s industries—they face more challenges on the financial front than the said Africans. Add economic sanctions to this scenario and what you have is an even more difficult economic environment.
This is an environment in which local companies often run short of foreign currency to procure lines of credit, in most cases, to import raw materials.
On the other hand, within the OECD realm, such interest rate levels have always been regarded as unacceptable. In the same environment, such a condition has only occurred occasionally in extreme cases such as in Germany after the World War II between 1946-48.
OECD inflation rates from 1958 to 2016.
The other recorded periods in which this phenomenon has occurred are 1962; 1972-76; 1970-82,1990 and to a lesser extent, 2010.
So it should not be surprising that in that environment, the benchmark for this rate as measured by the Consumer Price Index—CPI, has to date, been set at 5 percent-a single digit figure.
The reason for the current sharp rise of inflation in the West — now spreading to the other
economies of the world — has been caused by the war between Russia and Ukraine.
And although in this case, the USA, the current top world economy — had initially put a ceiling of 6 percent that is 1 percentage point above the previous one of 5 percent — to the inflation rate there — this strategy appears to be failing since it is now above 8 percent.
Now, let us critically examine why in the developing world — Africa included — inflation can easily acquire double digit levels whereas in the developed world, they have up to now, have managed to keep it quite low, around 2.5 -percent or thereabouts.
In order to do this with relative ease, we must first consider the nature of inflation and its causes. In simple terms, inflation is defined an inexorable rise in prices. And generally speaking, this
phenomenon has been defined as being due to ‘too much money chasing too few goods in the market place’.
The most fascinating but worrying thing about this phenomenon is that, in Zimbabwe, most of us who have had something to do with inflation — one way or the other — usually assume they understand it well. However, indications are that, to date, no one seems to know how to solve the problem.
To me, there appears to be too much trial and error in the way we are trying to manage the malady. This is a situation that seems to indicate that—for some unclear reason—we are trying to skirt around the issue in the process.
But logic informs us that if you are faced with a problem, you first need to find the cause, then proceed to treat it. But in this country, we seem to be making a strenuous effort to treat the symptoms without first dealing with the causes. Here you may now be asking yourself what I mean by such an assertion.
(In Part Two we shall be returning to this aspect of the matter)
Shambare is an agriculture economist based in Chinhoyi and is reachable on 0714045435
