eBusiness Weekly
Business Writer
THE Confederation of Zimbabwe Industries (CZI), the country’s largest industrial lobby, says high inflation is worsening poverty levels in the country after authorities missed 2022 year-end targets by wide margins.
In a report released last month, CZI said annual inflation ended 2022 at 243,8 percent, way above the 2022 National Budget December target of 15-20 percent, as well as beyond the central bank’s February 2022 target of 25-35 percent.
In the first six months of 2022, month-on-month inflation on average was 14,3 percent, reaching its peak in June at 30,7 percent. In the second half of the year 2022, average month-on-month inflation was 8,1 percent. In the last quarter of the year, average month-on-month inflation was 2,5 percent.
CZI said the cocktail of policies and measures introduced in the first half of 2022 (gold coins, delayed payments to contractors, scrutiny of invoices for contractors, hiking of interest rates) had a positive impact in reducing inflation.
It, however, noted the sudden increase in month-on-month inflation for December as a cause of concern, stressing new measures were needed to hold down inflation. Inflation in Zimbabwe is generally responsive to exchange rate depreciation, especially the parallel market rate, CZI said.
The 2022 National Budget inflation targets were completely missed by a margin of more than 200 percentage points. In 2023 the authorities have forecasted double-digit annual inflation and month-on-month inflation of 1 to 3 percent.
CZI said this means that the actual inflation target is a very wide range of between 10 and 99 percent. It noted such a range was too wide and difficult for business planning purposes.
The forthcoming Monetary Policy Statement expected this month should help by narrowing this range, CZI said.
The industrial lobby group said in December 2022, the parallel market rate started depreciating, which would be the most logical explanation for the resurging inflationary pressures.
By eroding disposable income and pushing more people into poverty, CZI said in its January 2023 macroeconomic briefing to members, inflation works against the poverty alleviation thrust of the National Development Strategy 1 (NDS1).
It said the impact of inflation on poverty was reflected in both the Zimbabwe National Statistics (ZIMSTAT) Food Poverty Line (FPL) per person and the ZIMSTAT Total Consumption Poverty Line (TCPL).
The FPL for December was $22,193, having increased from $21 652.27 in November 2022. This means that a family of five people with an income of $100 000 per month will not be able to afford the basic food requirements for all family members to stay out of poverty.
The TCPL for December 2022 was $29 219 per person. This implies that an individual should be able to set aside $30 000 to purchase both non-food and food items so as not to be deemed poor.
“In December 2022 food inflation accounted for almost 50 percent of inflation; out of the 2,42 percent inflation rate of December 2022, 1,20 percent was for food and non-alcoholic beverages.
“This shows that prices of food items including basic commodities have been increasing, which pushes consumers into extreme food poverty,” CZI said in the report.
According to the US-based Brookings Institute, for many households across the world, rising inflation poses a significant challenge.
With the war in Ukraine, the Brookings Institute said, matters are going quickly from bad to horrid.
It said food and fuel prices have spiked, as Russia and Ukraine are big exporters of many commodities including gas, oil, coal, fertilisers, wheat, corn, and seed oil. Several economies in Europe and Central Asia, the Middle East, and Africa are almost entirely dependent on Russia and Ukraine for wheat imports.
For lower-income countries, disruption to supplies as well as higher prices could cause increased hunger and food insecurity. And disruption to supply chains could broadly intensify inflation pressures.
“Higher prices can erode the value of real wages and savings, leaving households poorer. But these effects are not felt equally:
“Low- and middle-income households tend to be more vulnerable to high inflation than wealthier households. That reflects the composition of their income, assets, and consumption baskets,” the US think tank says.
Looking ahead, the industrial lobby group said, a reduction in inflation from more than 240 percent in 2022 to less than 100 percent by December 2023 is not an easy task.
It said it can only be achieved if the two main threats; a formal exchange rate platform that allows a true price discovery and tighter money supply growth, are dealt with. It remains to be seen if these two critical attributes will be achieved.
Without these drastic measures, CZI said, the 2023 inflation targets will be missed again as in 2022.
CZI said a number of factors were responsible for driving inflation in 2022 and the major ones included money supply growth, adverse expectations, external factors and inefficiencies of foreign exchange markets.
According to the Reserve Bank of Zimbabwe broad money increased by 350,4 percent from October 2021 to October to 2022. An increase in money supply causes demand-pull inflation, when it creates an increase in demand which exceeds an economy’s production capacity.
In addition, the increase in money supply resulted in the depreciation of the exchange rate as holders tried to convert their holdings into foreign currency, which also fuelled inflation.
In an inflationary environment with policy inconsistencies, economic agents expect higher inflation in future.
To cushion themselves from future inflation they will increase prices of their wares, thereby causing actual inflation. CZI said this was largely the case in 2022, especially during the first half. The anticipation of higher inflation was also creating inflationary pressures in 2022.
The lobby group suggested that creating a stable inflationary environment was the only way to ensure that adverse inflation expectations do not develop in 2023.
The year 2022 opened when the foreign currency auction market was the only official foreign currency exchange platform, before the introduction of the willing buyer willing seller platform (WBWS), which is now the official exchange rate determination platform.
“The auction suffered massive settlement delays, which increased traffic to the alternative sources of foreign currency, resulting in further depreciation of the Zimbabwe dollar, hence inflationary pressure,” CZI said.
The industrial lobby pointed out that the WBWS platform was yet to operate as a fully market based exchange rate determination system, with authorities trying to manage the depreciation of the rate.
The emergence of a parallel market premium causes distortions; limiting the ability of formal businesses to get foreign currency through sales, while also seeing the parallel market rate becoming the price determination tool.
“The emerging inflationary pressures in December 2022 can also be explained by the rigid WBWS rate. It is important that the market develops confidence with the WBWS rate in 2023, which can be done if the rigidities are eliminated,” CZI noted.
