eBusiness Weekly
Misheck Ugaro
As the country grapples with health related effects of the Covid-19 pandemic, the economy continues facing growing inflationary pressures which can be linked to money supply growth and a depreciating currency.
The annual inflation rate peaked to 765 percent in April of 2020 from 676,4 percent the previous month amid a weak exchange rate and food shortages. The lockdown measures announced in March increased consumer demand due to panic buying as households rushed to stock up and at the same time travel restrictions reduced the food supply chain. On a monthly basis, consumer prices rose by 17 percent, slowing from 26 percent in the previous month. The filter through impact of the price increases is, however, likely to push the month-on-month figure in May up. This rising trend for the annual inflation figure has persisted over the three months from February when authorities resumed publishing annual statistics after having only published month on month statistics in the prior year. The rate was at 540 percent in February.
Various sources have put the forecast annual inflation for May at 850 percent while conservative forecasts have set the end of year rate at 1 000 percent. Inflation expectations are based on the rising money supply as authorities have maintained the gold producer incentives and the fuel sector subsidies. The impact of the $18 billion stimulus package is only expected to filter through beginning in the second half of the year and therefore represents further inflationary risks if authorities allow any more money supply growth.
Money supply stood at $35 billion as at the end of February and is estimated to rise to above $40 billion by April. The authorities seem to have allowed money supply to continuously increase from below $28 billion in October 2019 and based on this trend, is now projected to surpass the $50 billion mark by mid-year in June 2020.
The four main components of the consumer price index are food and non-alcoholic beverages, housing and utilities, transport, and miscellaneous goods and services. While household and utilities did not rise significantly, it is the food and beverages component that contributed the biggest impact. A tripartite agreement was reached between the government, the retail services and consumer sectors to revert to prices applicable before the onset of the lockdown measures in March.
Prices did not fall as the retail sector did not revert to the original prices as had been agreed and anticipated. It is clear that despite the agreement reached above, prices are always sticky downwards but rise quickly. Expectations play a significant role in determining Zimbabwe’s inflation level. This is made worse by a sharply depreciating local currency.
While the authorities pegged the interbank rate at US$1:$25, calls have been made by many players and commentators that this fixed rate is superficial and is not supported by fundamentals on the ground. A call has been made by industry to adopt a crawling peg instead of a fixed rate as is the current situation. The fixed exchange rate does not mirror the actual fundamentals on the ground and the parallel rate has depreciated to US$1:$60 over the same period. With the failure of the 1:1 fixed exchange rate regime still fresh in market players’ memories, the new fixed exchange rate has therefore not held ground. Authorities are urged to review this policy position.
With the rising inflation and a depreciating currency the country’s GDP is forecast to continue on a declining trend. According to Africa Investment Forum of the AfDB Group, it is expected that the country will record a contraction of up to 8,4 percent by the end of the year, December 2020. The prior year had recorded a 6,5 percent decline. Recovery would depend on a quick turnaround in the real sector. In the medium term, however, fiscal and monetary reforms are expected to provide impetus for recovery. Authorities are, however, urged to avoid reliance on money supply growth as a root to finance the current challenges from the Covid-19 pandemic.
Even though the reopening of industry following the lock down period is likely to exert pressure on demand for foreign currency for purposes of financing imported raw materials, the tobacco selling season started with reasonably good prices and it is projected that will assist in easing pressure by improving the supply side of currency. While the crop is down to about 230 million kilogrammes this year due to “grim” weather conditions, according to the Tobacco Industry Marketing Board, the opening of the season started with firm prices at $5 per kg which favourably compares with the previous season’s average prices which were low at $2 per kg.
Going forward, authorities are advised to cut off any further money supply growth and relax the exchange rate policy. There are justifiable grounds for reinstituting the original shift of the market onto a willing seller willing buyer basis that had shown a narrowing of the premium between the interbank and parallel exchange rates.
Misheck Ugaro is a former expatriate banker based in several SADC countries and currently works as a corporate advisory services consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society. He can be contacted on (263) 777052004/712808140; [email protected]; Linkedin: https://www.linkedin.com/in/misheckugaro; Twitter: @twitcagan.com
