eBusiness Weekly
Golden Sibanda
Inflation is likely to keep rallying driven by liberalised and increased food imports, which will fuel demand for foreign currency procured by some on the parallel market at steep premiums, with the cost passed on to consumers.
Analysts have projected inflation to maintain an upward trend although the central bank says inflation will slow down after the monthly rate fell closer to its target of 10 percent by December 2019, when it closed at 15 percent.
Going forward, the Reserve Bank of Zimbabwe expects the month-on-month rate to continue to decelerate and forecasts that by the end of the first quarter of this year the monthly rate will fall to single digit levels.
According to the apex bank, Zimbabwe’s annual rate of inflation, which hit 175,6 percent at the last official count in June last year before its calculation was suspended, is projected to close the year circa 50 percent.
Zimbabwe will next month resume calculation of the annual rate, now estimated around 521 percent, when it collates data on inflation trends since February last year when it switched back to its local unit.
However, Zimbabwe only enacted legal provisions for exclusive use of the domestic currency in all most transactions in June after which the Government scrapped the multi-currency, used since 2009.
But equities and economic research firm IH Securities believes that despite the central bank’s forecast, inflation will continue to rally, largely based on the liberalisation of food imports and rising cost of imported inputs.
Zimbabwe has liberalised food imports, especially maize meal and grain, following a devastating drought in the 2018/2019 agricultural season, leaving over 6,5 million people in serious need of food assistance.
Low industrial productivity, which averages below 42 percent, has also increased the demand for foreign currency, not readily available on the official interbank market but can be bought on the black market at high premiums. Zimbabwe also loses hundreds of millions of scarce US dollars importing fuel and diesel as well as electricity.
“We anticipate an increased appetite for foreign currency as the local currency continues to depreciate which will result in a spike in inflation levels, as the cost of procuring free funds is passed on to consumers and corporates alike. Pressure on the local currency will be further exacerbated by lower foreign currency reserves as tobacco and gold output are expected to be subdued in 2020,” IH Securities said in a recent research note.
This also comes as Zimbabwe has to rely mostly on internally generated foreign currency to wet its insatiable appetite for imports as it has not been able to get external balance of payment support since 2001.
The RBZ resolved to maintain the overnight bank rate at 35 percent, to curb exchange rate fluctuations and inflation rally, which breached the 521 percent year on year mark in December 2019, according to IH’s estimates.
According to the RBZ, total foreign exchange receipts for the 9 months to 30 September 2019, were down 9 percent to US$5,46 billion from US$5,98 billion amid a decline in receipts from major export earners.
Notably, while Zimbabwe already experiences shortage of hard currency, key contributors to foreign currency receipts such as mining, tobacco and international money remittances declined in 2019 compared to 2018.
IH Securities said due to the current economic and environmental woes, which include, power cuts, surging operating costs and a severe drought, they anticipate subdued output from the major currency earners.
Zimbabwe has suffered from galloping inflation since taking the decision to float its currency in February as part of widespread reforms initiated by Finance and Economic Development Minister Mthuli Ncube in October 2019.
A month before inflation bolted, Zimbabwe enjoyed one of the lowest inflation rates in the region, at 5,39 percent in September, but that was before it also started the process to de-link its surrogate currency from the US dollar. Zimbabwe enjoyed remarkably low inflation during most of the period when it used the multi currency regime, which was largely dominated by the US dollar, one of the world’s most stable and sought after reserve currencies. The World Bank said recently that Zimbabwe’s inflation has been increasing since October 2018, driven by excess liquidity from monetization of sizable fiscal deficits of the past, price distortions, and local currency depreciation.
Finance Minister Professor Mthuli Ncube recently told international media that the inflation rally was to be expected as this is what happens when you liberalise a previously pegged local currency exchange rate.
“We said that month-on-month inflation is going to be stabilising and going to be dropping, that’s what has been happening,” Ncube said.
“We believe that we are on our way to dealing with inflation. It will take time, but we are headed there,” he said.
