While the Government is upbeat of managing inflation to below 3 percent level, market experts opine that failure to keep a tight lead on money supply may trigger inflationary pressures and exchange rate volatility.
Government has set a month-on-month inflation target rate of between 1 percent to 3 percent.
Year on year inflation is expected to continue on a slow down to double digit levels. This is underpinned by assumptions of continued tight monetary and fiscal policy stance, stable foreign exchange market, strengthened government procurement processes, mopping up of excess liquidity and stable global commodity prices.
However, FBC Securities think otherwise due to a myriad of factors such as increased spending for agriculture and funding for the harmonised election this year.
“Ahead of the 2023 harmonised elections and higher spending to fund the 2022/23 farming season, there is likely to be pressure on money supply, which if not carefully managed may trigger inflation and exchange rate volatility,” said FBC Securities in their 2023 economic outlook.
Additionally, global inflation shocks resulting from geopolitical tensions, rising food and energy prices as well as supply chain disruptions present downside risks to the inflation outlook.
Following the policy interventions last year to tame inflation the gap between the official exchange rate and parallel rate narrowed to 15 percent from circa 500 percent.
However, towards the end of the year, devaluation of the local currency on the parallel market accelerated over the festive season, with some vendors quoting rates $1000 for US$1 as opposed to the official interbank rate of $684,33 at the end of the year.
Despite the inflationary pressures, there is a ray of hope coming from the agriculture and mining sectors with overall economic growth projections set at 3,6 percent.
“By the end of 2022, the country’s agricultural sector was already showing promising signs for the 2022/23 season with just over 465 700ha of maize planted by mid-December, compared with just over 215 480ha by mid-December in 2021.
“The sector is poised for favorable performance in the current season owing to projections of above normal rainfall and access to government and private inputs,” said FBC Securities.