ZIMBABWE will likely remain under heavy inflationary pressures this year, weighed down by the weakening domestic currency and the cocktail of measures announced in the 2024 National Budget to boost fiscal revenues, according to the Confederation of Zimbabwe Industries (CZI).
Against this background, the country’s largest industrial lobby group said the 2024 Monetary Policy Statement expected today was expected to continue to come up with interventions to maintain non-inflationary liquidity of the local currency and a stable exchange rate.
Inflation in Zimbabwe, which the country has grappled with since the reintroduction of the domestic currency in 2019, is largely influenced by the local currency exchange rate given that prices across the economy are pegged against the US dollar.
Zimbabwe scrapped its domestic currency in 2009, following hyperinflation in the decade to 2008.
During the tumult, the annual inflation rate reached a record 500 billion percent by August 2008, according to the International Monetary Fund, although Government of Zimbabwe disputed the figures.
CZI, said as per the 2024 National Budget, the Reserve Bank of Zimbabwe will target a month-on-month inflation rate of less than 3 percent throughout 2024. However, the industrial lobby group warned that some of the measures proposed in the 2024 fiscal plan will cause inflationary pressures that will make the attainment of this target difficult.
This will add pressure from a continually weakening domestic currency, which has also seen the parallel market exchange rate premium rise from an average 20 percent in the second half of 2023 after authorities moved in to curtail the currency free fall from the beginning of May 2023, to circa 56,6 percent presently.
Zimbabwe’s inflation rate rose in January 2024 as a depreciating Zimbabwe dollar pushed up the prices of goods and services.
The Zimbabwe National Statistics Agency (ZimStat) said the annual inflation rate for January rose to 34,8 percent from 26,5 percent in December 2023. Industrialists have predicted measures in 2024 designed to bolster Government revenues, will paradoxically propel current inflationary pressures.
According to CZI, the levy of US$0,001 per gramme of sugar contained in beverages, will increase the price of beverages. The effective levy follows a down review from the initial proposal of 2 percent, which businesses warned would drive prices beyond the reach of many.
The Strategic Reserve Levy currently charged for every litre of fuel was adjusted upwards by US$0,03 per litre for diesel and US$0,05 per litre for petrol from January 1, 2024.
This will result in increased fuel pump prices, spiking cost of production for companies, to be passed on to consumers,” the industrial lobby noted in a review of 2023 and 2022 currency and economic developments as well as the outlook for 2024.
It noted the wealth tax levied at a rate of 1 percent of market values of residential properties, announced by Finance, Economic Development and Investment Promotion Minister Prof Mthuli Ncube in November last year, will result in increased rentals, which has an impact on prices for rented premises.
“An increase in toll fees by 100 percent in premium roads will result in increased prices of goods transported by road. It will affect the transportation of raw materials and the final product; thus, the cumulative cost can be exorbitant,” CZI added.
The industrial grouping had also warned the removal of many basic commodities from value-added tax zero rating to standard rating, which included meat, rice, soap, washing powder, toothpaste and petroleum jelly, was likely to result in inflationary pressures of at least 15 percent.
However, the issue has since been addressed after the Government last week bowed down to pressure from industry and commerce, which saw import duties restored on the affected essential goods.
“Given that the measures affect the USD pricing as well, the inflationary pressures that will take effect from January 2024 are expected to remain throughout the year, as the base consumer price indices for 2023 are relatively lower. Thus, it is not likely that the inflation targets for 2024 of between 1-3 percent will be achievable,” CZI noted.
Expressing fears the script will repeat itself, CZI said the first half of 2023 was characterised by a persistent increase in blended month-on-month inflation, and this resulted in the government introducing measures to curb the runaway inflation in May 2023.
By July 2023 the impact of the measures was felt as blended month-on-month inflation nosedived from 12 percent in June to 1 percent in July 2023, shedding 11 percentage points.
However, CZI said, the inflationary pressures for December 2023 were pronounced on a month-on-month basis, as blended month-on-month inflation increased from 4,5 percent recorded in November 2023 to 4,7 percent in December 2023 gaining 0,2 percentage points.
“This clearly shows that the government was not able to meet the 1 percent to 3 percent month-on-month inflation rate target as stated in the 2023 National Budget statement,” CZI said.
Therefore, the manufacturing business member group said the government needed to pursue policies that are aimed at bringing about currency stability in 2024, as currency depreciation still explains the inflationary pressures emanating from the Zimbabwe dollar currency.
Zimbabwe’s central bank and the ministry of finance are working on measures to stabilise the local currency, the central bank governor Dr John Mangudya said this week.
The Zimbabwean dollar has fallen about 40 percent since the start of the year, causing inflation to accelerate.
Earlier this week President Emmerson Mnangagwa said authorities were looking to introduce a “structured currency”, without giving finer details. This comes as Dr Mangudya was expected to deliver the 2024 monetary policy, which would provide further details on the plans.
“Currency stability is crucial to both the government and the business community as this will facilitate planning, which is currently difficult with an unstable currency,” CZI noted.
CZI pointed out that the requirement that US dollar prices should be based on the official exchange rate plus a 10 percent margin meant that the implied exchange rate in formal shops would be significantly lower than the parallel market exchange rate.
Resultantly, the formal retailers would not be attractive for US dollar purchases compared to the informal sector. “This also implies that foreign currency access will continue to be a challenge for the compliant retailers unless the parallel market premium shrinks significantly”.
The situation is making it difficult for businesses to price their products in line with regulations, which prescribe that US dollar prices should be based on the official exchange rate plus 10 percent margin.
Confederation of Zimbabwe Retailers of Zimbabwe (CZR) president, Denford Mutashu, last week attributed the exchange rate depreciation to growing local currency liquidity and limited availability of US dollars.
“It is a complex one, what it should indicate is the limited availability of foreign currency against the local currency,” the industry executive said, adding the situation mostly affects formal retailers. Informal traders use the market rate or demand US dollars in most instances,” he said.
He said the exchange rate volatility affected mostly formal retailers who are bound by law to follow legislated pricing guidelines.
“It affects formal retailers mostly because they are forced to apply the official exchange rate when pricing yet no supplier, if there are; they are very few, can give you products in the local currency. If they do so is also an element of forward pricing.
“It then becomes difficult for the retailer or wholesaler to do the balancing act of complying with Statutory Instrument 118A of 2022, which stipulates the official exchange rate plus 10 percent cap. It is quite unfortunate,” the source said.
The situation has created financial challenges for most formal retailers, who can no longer pay upfront for goods and services while suppliers and manufacturers are also keen to accept local currency or offer terms for Zimbabwe dollar payments.
This comes as Zimbabwe’s economy continues to self-dollarise.
“I think we have got a near market failure, which requires fundamental changes to monetary and fiscal trajectory because so far there have been a lot of concerns from several businesses, whose indication was the budget did not need to do much.
“The Government simply needed to repeal the statutory instrument that compels businesses to apply the official exchange rate plus 10 percent cap or at least, if the Government is not willing to repeal it completely it could move the cap from 10 percent to around 25 percent.