Zimbabwe: controlling inflation is a tough task


Zimbabwe’s National Statistics Agency (Zimstat) pointed out that the (annual) year-over-year inflation rate increased slightly to 51.55% in September 2021 from 50.24% in August 2021 after 8 consecutive months of decline from 363% recorded in January 2021.

The increase comes as a result of a widening of the spread between the formal auction rate (now US $ 1: ZW $ 88.55) and the parallel market rate (now averaging US $ 1: $ 180 ZW).

The increase in the inflation rate indicates the deafening impact of the shadow market on the local economy, with prices from large, fast-moving consumer goods retailers, major producers and service providers following the market rate very closely. parallel. This means that only selected government utilities and civil service pay are indexed using the formal auction rate. In addition, the monthly inflation rate (MO-M) in September was 4.73%, an increase of 0.55% from the August 2021 rate of 4.18%.

Inflation and poverty

Despite the marked decline in the inflation rate since January 2021, the market basket has continued to increase each month. The statistics agency pointed out that the Total Consumption Poverty Line (TCPL) for one person is ZW $ 6,654. The TCPL represents the total income necessary for an individual with all his income added up to the minimum so that he is not considered poor in the country. This means that an average family of six now needs ZW 39,924 per month to cover their daily expenses, which translates to $ 455 if the formal indexed auction rate is used and $ 228 if the dominant rate in the market is used. parallel market is used. This means that the majority of Zimbabwe’s workforce in both the public and private sectors now live in poverty, as average wages remain below ZW $ 20,000. Meager wages have crippled the delivery of public services, especially in education and health care where the modes are permanently idle

2020 recovery

The World Bank’s economic report released in June 2021 contained worrying trends regarding the increase in extreme poverty in the country. The report pointed out that the number of the extremely poor reached 7.9 million in 2020 (half of the population). Economic disruption caused by COVID-19 closures has reduced jobs in urban areas and limited income-generating opportunities in rural areas. The pandemic has added more than 1.3 million people to extreme poverty in 2020 in an environment where persistent droughts (effects of climate change), high levels of inflation and economic instability have devastated many livelihoods. subsistence. Annual inflation averaged 622% in 2020.

The World Bank classifies extremely poor people as people living on less than $ 1.90 per day (less than $ 57 / month). Extreme poverty in Zimbabwe increased sharply in 2019 and 2020, from 29% in 2018 to 34% in 2019 and 49% in 2020. This means that more than 2.2 million Zimbabweans have fallen into extreme poverty in the country. during these 2 years. This year, poverty levels are expected to decline due to above-normal rainfall received during the 2020/21 agricultural season.

The pace of re-dollarization and the marked decline in inflation levels also mean that disposable income has not been eroded at the same rate as in 2020.

Main causes of inflation

Although the inflation rate has weakened considerably, it remains high to support the decline of the local currency and ensure lasting economic stability. The main causes of inflation in the economy are the growth of the money supply, with the reserve currency rising from less than ZW $ 22 billion in January 2021 to ZW $ 29 billion at the end of August 2021. Payments governments to corn, tobacco, wheat, soybeans and cotton producers have a direct effect on increasing the money supply and the demand for foreign exchange in the parallel market. The easing of foreclosure restrictions has also seen the opening of various small businesses and informal markets where imported goods are sold, meaning that demand for foreign exchange by cross-border traders and households has also increased. The trend is expected to continue until the end of the holiday season in January 2022. This means that the parallel market rate is expected to continue to strengthen. In addition, the inefficiencies of the auction market have also increased the demand for foreign currencies in the parallel market by businesses.

Inefficiencies of the auction market

The auction has so far allocated $ 1.734 billion to formal market producers and businessmen since June 2020, against a formal demand for foreign exchange exceeding $ 5.5 billion in one year. This means that successful bidders receive between 20% and 30% of their foreign exchange requirements from the auction platform, with the remainder coming from daily income and the shadow market. The auction market has so far allocated only 33% of the official foreign exchange needed to finance imports into the country since June 2020. The figure does not take into account the billions of smuggled imports and cross-border trade where transactions are processed in hard currency to escape. customs. As a result, the auction platform is far from efficient in allocating currencies to all players in the economy and the situation is only getting worse with allocation arrears now exceeding 3 months as the Backlog is estimated at $ 270 million.

Critically, the system’s price discovery mechanism has been removed by the intervention of the central bank by fixing the exchange rate, which means that holders of foreign currency (mainly exporters and foreign missions operating in Zimbabwe ) see no point in unloading excess foreign currency on the formal market. Deposits of foreign currency accounts (FCAs) with local banks have now exceeded US $ 1.8 billion and the trend is expected to continue provided the auction rate remains well below the free market rate. The auction exchange rate does not reflect economic dynamics such as current account balance, money supply, foreign investment and confidence. Additionally, the amount to be auctioned each week is not known in advance, meaning the auction trades virtually weeks in advance for foreign currency that is not available. This means that the amounts traded or allocated each week are ripped off at the head with limited input on the availability of foreign currency.

Improve the auction system

To address the above inefficiencies, the central bank should improve transparency by communicating in advance the exact amount of foreign currency available to bidders and committing to settle winning bids within 3 days (T + 3). This means that the weekly auction should only be done if the winning bids from the previous week are fully settled and records show that the winning bidders are using the foreign currency for stated purposes. The bank should also eliminate producers and retailers (especially oil players) who sell their products exclusively in US dollars or using parallel market rates. In addition, the central bank must learn from the mistakes of the past when exchange rate fixing undermined the local economy and depleted export capacities. Exporters and holders of foreign currencies should be allowed to exchange their foreign currencies at market-determined rates when the auction market is decentralized from central bank control. The central bank should mimic the basic principles of central bank intervention by using political incentives and market instruments to mop up excess liquidity. Likewise, reducing inflation can only be achieved sustainably by limiting the growth of the money supply and aligning interest rates with inflation levels.

Zimbabwe’s government has revised upward its target of reducing annual inflation to below 35% by December 2021, but money supply growth, increased demand for foreign exchange and inefficiencies in auction markets make the task of controlling inflation difficult. The task would require sufficient fiscal reforms on how the government finances payments for agricultural products and weaning the auction system from central bank control to ensure uncovered free market prices. Undoubtedly, both tasks have collateral damage to entrenched interests within government and beyond. In view of the above, annual inflation is expected to be broadly between 50 and 65% in December 2021.

Victor Bhoroma is an economic analyst and free market lobbyist. He holds an MBA from the

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