eBusiness Weekly
Tapiwanashe Mangwiro
ZB Financial Holdings in its latest report cemented concerns of massive election induced money supply growth that were also raised by Old Mutual Investment Group (OMIG) in their first quarter report.
The bank believes efforts to prevent surging inflation whipping up economic trouble are likely to be thwarted by the widening gap between the official and parallel exchange rates and expected election induced money supply growth.
Zimbabwe is pencilled to conduct its harmonised plebiscite next year and traditionally, the period before the elections is characterised by heavy spending by both the governing party and the opposition political parties.
The motive of such huge spending in both local and foreign currency, is meant to persuade the electorate to vote for them. However, such spending at times comes with some serious consequences to the economy as a whole.
The rising inflation levels have been attributed to volatility of the parallel exchange rate. The Zimbabwean dollar is officially trading at 159,34 to the US dollar and at 350 on the black market.
Inflation in April came in higher due to parallel rate movements and the general increase of prices globally causing imported inflation.
“The year-on-year inflation rate for the month of April 2022 as measured by the all items consumer price index (CPI) stood at 96,4 percent.
“This means that prices as measured by the all items CPI increased by an average of 96,4 percent between April 2021 and April 2022,” the Zimbabwe Statistics Agency (ZimStats) said recently.
“The month-on-month inflation rate in April 2022 was 15,5 percent gaining 9,2 percentage points on the March 2022 rate of 6,3 percent.
“This means that prices as measured by the all items CPI increased by an average rate of 15,5 percent from March 2022 to April 2022,” ZimStats added.
OMIG on the monetary measures to tame inflation said; “These measures are unlikely to result in satisfactory and sustained stabilisation of prices given foreign currency shortages.”
It clearly stated that foreign currency shortages will persist amid increased dollarisation.
“The interbank rate is increasingly being alienated in the market given the growing and unsustainable divergence with parallel rates.
“This points to inevitable dollarisation to stabilise prices.”
“There is a strong correlation between currency depreciation and inflation, which ended the quarter with a year-to-date value of 19,82 percent,” OMIGZIM stated in its latest quarterly report.
On the other hand, the economy is currently faced with low levels of confidence, speculation and short-termism also power shortages resulting in cyclical foreign currency shortages while on a broader scale — limited access to external finance due to geopolitical and country risk considerations.
But, Zimbabwe’s GDP growth is poised at 5.5 percent GDP in 2022.
The growth will be underpinned by higher output in mining, manufacturing, agriculture, construction as well as the accommodation and food services sector.
Where will election money come from?
In its full year results ending December 31, 2021 ZB Financial Holdings highlighted that the inflation out-turn will continue improving in 2022 because of a tight monetary policy, complemented by fiscal discipline.
“However, the slow-down in inflation remains under threat from possible expansion in the monetary base to fund obligations such as civil service wage increases and the 2023 harmonised National Elections, the widening gap between the formal and alternative market exchange rates, among other factors,” the bank said.
The investment group acknowledged that there is growth in the economy, but part of the money was from election spending, which was increasing money supply.
“Growth is being driven by strong performance in 2021 of major sectors including agriculture and mining and election spending.”
While the Government talks of bumper harvest for the 2021/22 farming season, critics say agriculture output will be lower than prior year given the impact of adverse weather conditions.
“Downside risks to the attainment of projected economic growth for 2022 pertain mainly to the possibility of a sub-optimal 2021/2022 agriculture season, following prolonged dry spells during the season, which look set to negatively impact on the food security situation,” ZB said.
Risk also arises from uncertainty in international commodity prices, and higher than anticipated international oil prices especially following the Russian-Ukraine war and resultant disruption of supply chains, according to the bank.
At the core of the increase in inflation is the growth of money supply, which is due to agriculture commodity payments and payments to firms contracted in various infrastructure projects.
With the growth of money supply being a problem for the economy, with the election year coming up next year, more printing is expected.
Economist, Namatai Maerekera said; “Campaign funds are most likely to come from the Central Bank through printing, which will increase the demand for the greenback. With inflation being driven by the increased appetite of the scarce US dollar, prices are likely to increase in 2022.”
The RBZ last year saw its inflation targets shifted thrice from the initial below 10 percent target at the beginning of the year to 25-35 percent range mid-year, to 53 percent in the last quarter, which was also shifted to 60 percent at the close of the year.
