Zimbabwe: Consumers Bear Brunt of Inflation

ZIMBABWE in 2018 experienced a dramatic rise in inflation and widening price increases after Finance minister Mthuli Ncube hinted that there was need to separate the Real-Time Gross Settlement bank balances from foreign currency accounts.

Economists say the price increases that have seen inflation rising to 31,01% are a reflection of unresolved exchange rate valuation distortions between the US dollar and the RTGS, low foreign investment and external debt issues.

Zimbabwe's year-on-year inflation rate for the month of November gained 10,16% to 31,01% from 20,85% in October.

This implies that prices as measured by the all-items consumer price index increased by an average 31,01% between November 2017 and November 2018.

Month-on-month, the inflation rate was 9,20%, shedding 7,24% on the October 2018 rate of 16,44%.

The wave of prices increases was triggered by the collapse of the local currency in October owing to panic buying by consumers after Ncube announced plans to devalue the local currency believed to be as valuable as the US dollar.

Government in the year failed to contain its expenditure, fuelling inflation after aggressive issuances of Treasury Bills that exceeded US$2 billion as at September 2018.

The rise in the issuance of TBs, which is draining hard currency, fuelling inflationary pressures and destabilising the financial system amid mounting budgetary pressures, emanates from government's propensity to live beyond its means.

Government has since begun implementing measures to curb prices of basic commodities, including removing restraints on importation, but this has so far failed to correct the value of the bond note.

The US dollar is trading at a premium to the local currency of 350% on the parallel market, a general gauge of the real value of the currency in the country.

Economists say they are optimistic that inflation may stabilise at two-digit levels in the 1st quarter of 2019 but the situation remains uncertain.

Official inflation figures are in doubt, with economists saying it is understated by ZimStat.

They say ZimStat is failing to recognise the extent to which the economy has informalised.

Released statistical figures are calculated based on the formal sector which only accounts for a small margin of Zimbabwe's economy. Economist Prosper Chitambara told businessdigest that the inflation figure is not accurate and does not reflect the reality on the ground. He said recent payouts by government of civil servant bonuses are also likely to stoke inflationary pressures but the economy should stabilise in the coming quarter.

"In 2018, we saw an upward trend in the second half of the year largely reflective of an increase in money supply not backed by any production in the country. We also saw the widening of the black market activities further fuelling inflation.

"However, official statistics are understated as they only track what happens in the formal market which is not really the case as we can see that the country has become highly informalised," he said.

Chitambara said government's failure to account for parallel market foreign exchange activity had resulted in price increases.

"We have also seen a lot of pressures as government tried to finance its expenditure. So the figures are never accurate. I see inflation stabilising around 20% in the 1st quarter of 2019 but will remain at two-digit levels but will be dependent on the monetary sector. Again, we have seen government making payouts to the civil service sector which is likely to feed into inflationary pressure. I am just optimistic but it is a bit tricky," he said.

Another economist Clemence Machadu said the havoc inflation has wreaked this year simply mirrored government's inaction in resolving underlying problems in the economy such as foreign currency, foreign investment and external debt issues.

"We are certainly not in a better position compared to last year because household incomes have remained constant while the general price level has been advancing northwards. So what it has done is depleting the real income levels of the generality of the populace as spending power weakens. This reduced domestic demand is also going to create another problem on the supply side, as industrial capacity utilisation might be also forced down, since the production of goods is signalled by demand for such.

"Our policymakers and those that inform their thinking should now think outside the box and stop this behaviour of marinating a rotten chicken and denialism. Policies that are not working should be simply replaced with those that work. For instance, this fallacy of maintaining that the bond note is at par with the greenback should perish. We have been down this road before and we did not act this way to resolve the problem. In the Gideon Gono era, when the local currency menace got to the zenith of absurdity in 2008, he allowed approved shops to sell in foreign currency before dollarisation was officially embraced the following year. Why are we doing the opposite now?" he asked.

Last year, the World Bank projected an average rise in inflation rate of 5% during 2018 while the Reserve Bank of Zimbabwe (RBZ) said it expected inflation to fall between 3% and 7% by December 2018.

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