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Global supply shocks undermine price stability

19 Aug, 2022 - 00:08 0 Views
Global supply shocks undermine price stability

eBusiness Weekly

Nelson Gahadza

Zimbabwe’s exposure to global shocks undermines efforts to rein in inflation while further downside risks are emanating from the expansionary fiscal policy that has potential to increase liquidity within the economy, a research company has said.

IH Securities in its macro-economic review report said the country is vulnerable to global inflationary pressures arising from global supply chain disruptions.

The cost of power and fuel has also gone up year to date (YTD) in real terms by 50 percent and 25 percent respectively.

“Apart from imported inflation, further downside risks are emanating from the expansionary fiscal policy that has potential to increase liquidity within the economy and therefore increase inflationary pressure,” it said.

Zimbabwe’s annual inflation surged to 256,9 percent in July 2022 from 191,6 percent the previous month, according to the Zimbabwe National Statistics Agency (ZimStat).

The country has experienced inflationary pressure over the past seven months, driven partly by external factors as well as exchange rate volatility.

Finance and Economic Development Minister Mthuli Ncube has often said that imported inflation contributed significantly to domestic inflation through cost-push factors.

In response to the uptick in inflation, the Government,  at the beginning of the month, introduced a host of measures intended to restore macroeconomic stability, boost confidence in the economy, increase the appeal of the local currency, preserve value for depositors and investors and deal with market indiscipline.

The measures included a temporary suspension of lending, further reduction of the quarterly reserve money growth target to 0 percent as well as an upward review of Capital Gains Tax for short term investments on the stock exchange from an initial 2 percent to 4 percent.

The Monetary Policy Committee also resolved to put in place measures intended to align interest rates with the inflation developments, enhance circulation of foreign exchange and introduce an investment instrument to assist holders to store value in gold coins.

These include increasing the Bank Policy Rate from 80 percent to 200 percent per annum, increasing the Medium Term Accommodation interest rate from 50 percent to 100 percent. ZWL minimum deposit rates were also increased from 12,5 percent to 40 percent for savings deposits and from 25 percent to 80 percent for time deposits.

IH, in its report, said the mid-term budget was largely centred on cushioning the consumer by increasing civil servants’ salaries, tax-free threshold and increasing the exempt portion of bonus.

“The intention seems to be to tighten monetary policy enough to cool the economy and lower inflation but have a fiscal policy that softens the landing for civil servants so that the tightening does not send the economy into a recession,” it said.

IH said macro stability will remain guided by the central bank’s ability to manage inflation and exchange rate stability.

It added that a stable exchange rate encourages business confidence and therefore investment, thereby supporting economic growth.

“A combination of restricted lending and higher interest rates compelled investors to unwind positions and unlock funds from the stock market.”

On other hand, IH said the current account surplus since last year has not translated to a strengthening local currency, although this is partially explained by increased genuine demand for forex as the private sector increased production to meet demand and increased expansion capital expenditure.

“From mid-July, the exchange rate premium has collapsed from circa 102 percent to the current 49 percent while the parallel rate cooled from US$1: $790 to the current US$1: $720,” read part of the report.

IH noted that with the cost of borrowing increasing, the banks’ loan books may come under some pressure as corporates adjust to higher costs of debt funding potentially translating to subdued interest income in the short term.

It added that appetite for loans in the devaluing domestic currency would be preferable however; the numbers suggest banks are gravitating towards loans in the more stable currency to protect balance sheet value.

“Given the need to repay US$ loans, some borrowers may need to change their business models to ensure they earn more foreign currency. This will partly support further dollarisation in the formal sector,” said the research firm.

It indicated that non-performing loans (NPLs) are of concern, as at 30 June 2022 the average NPL to loans ratio for the banking sector was 1,5 percent from a December 2021 position of 0,94 percent. IH said the increase may be a reflection of increased lending activities while also believing the transitory nature of deposits will continue to deter banks from lending long term, further affecting loan book and interest income growth.

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