Rangarirai Mberi
21 February 2005
CENTRAL bank is putting a brave face to the first rise in inflation in twelve months, amid growing concern that RBZ's splurging on the public sector will halt its recent successes against rising prices.
Research by two economists made available to StandardBusiness shows that in addition to a larger civil service wage bill, spending from central bank on parastatals, councils, cheap productive sector support, subsidies to exporters and other costs could swell expenditure by up to $26 trillion. This far exceeds acting Finance Minister Herbert Murerwa's estimates of $19 trillion.
Latest inflation numbers from the Central Statistical Office showed annual inflation up 0,9 basis points to 133,6% in January, a largely unexpected rise that is the first perk since January 2004. However, a senior official in the bank's economic research division told StandardBusiness Wednesday that the RBZ was "not rattled" by the rise.
"I don't think it (the rise) was entirely unexpected. You've got to account for seasonal price adjustments and wages at year end, and we did just that," the RBZ official said. "We are not rattled. We have little reason to worry too much about this - the outlook (for inflation) still remains positive."
The official was defiant in the face of criticism over the impact that RBZ's "salvation money" will likely have on its own money supply targets. The bank official said he had great confidence in the competence of RBZ's liquidity management, which is underpinned by a cocktail of instruments that include RBZ Bills, RBZ Financial Bills, Special TBs and open market operations bills.
But researchers are sceptical that these instruments will have the capacity to consistently manage the excess cash that Gono's plan will pour into the economy.
The rise in inflation may have been marginal, but economist Dave Mupamhadzi warns that the January figure is evidence that inflation remains a threat.
"This shows that we are not yet out of the woods. A lot still needs to be done to keep inflation coming down," Mupamhadzi said, urging measures to stabilise the exchange rate and food prices, which he says will be the two key concerns for authorities going forward.
One economist gave an analogy of a football team, leading a league table by only two points. "If you lose, and the number two team wins, you are behind by a point. That's how inflation has the pressure on us right now."
RBZ chief Gono says he will ensure that money supply aggregates only grow "at levels that are consistent with real economic activity".
But critics will point to his public spending as a strong source of precisely that: money supply growth that is not linked to real economic activity. Gono will spend $10 trillion trying to save State utilities and local governments over the next 24 months.
Gono believes that, despite his splurging on the public sector, he will be able to restrict broad money supply growth to 60% by the end of 2005, and 14% by mid-2006.
RBZ has set a bullish tone on inflation, cutting the overnight rate - the key policy rate - and preparing a plan to make further cuts on the rate over the next five months. The rate policy, according to Gono, reflects the "resounding success on the inflation-reduction front".
The earliest sign that the fight against inflation was getting progressively tougher came in December, when the annual rate recorded its narrowest fall since the January peak of 622%. December's inflation rate fell from November's 149% to 133%, the 16 basis points difference a far cry from the 63 percentage point fall in September which encouraged central bank to raise its inflation targets.
Although the December figure fell well inside RBZ's revised inflation target of below 150%, it gave reason to worry that monetary authorities would not find inflation as easy a problem to defeat as they seemed to believe.
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