Zimbabwe’s inflationary projections are unrealistic

 Zimbabwe’s inflationary projections are unrealistic

Zimbabwe’s inflationary projections are unrealistic.

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Zimbabwe’s inflationary projections are unrealistic given Zimbabwe’s history of poor monetary and fiscal policy with the country’s challenges expected to remain acute in the short to medium term, market watchers have said. Inflation is expected to average 134, 8% in 2021 and close at an annual rate of 9,0%, while month-on-month inflation is expected to average below 1,0%. Annual inflation peaked at 837,58% in July 2020 and has been on a gradual decline, closing at 348,59% in December 2020while m-o-m inflation was 4,22%.

M-o-m inflation has trended below 10% from August 2020 which was at 8,44%.

Despite available statistics show a downward trajectory on the inflation rates, in January the family basket continues to rise and an ordinary family of five now requires an average of $24 935 to cover its monthly expenses. Recently the Zimbabwe National Statistics Agency (ZIMSTAT) reported that the Food Poverty Line (FPL) for one person in January 2021 was $3,768.00 while the Total Consumption Poverty Line (TCPL) for one person stood at $4,987,00 in the same month.

An advisory firm Imara capital Zimbabwe , in its Zimbabwe 2020 Review and 2021 Outlook  noted that  with the possibility of higher spending, lower real revenues, reduced external funding, and waning investor appetite for government debt, the authorities may resort to monetary financing, stoking further inflation. The monetising of deficits risks is seen further undermining independence and effectiveness of the central bank.

This is expected to un-anchor inflation expectations and add to pressures on the currency.

“Moreover, inflation depends significantly on economic expectations of it, making it hard to reduce inflation once it has hit higher levels. However, given Zimbabwe’s history of poor monetary and fiscal policy, including one of the worst instances of hyperinflation, this seems unrealistic. The exchange rate push factor has been the most significant driver of inflation. Although the Foreign Currency Auction System has resulted in some exchange rate stability, we believe it is fragile. The auction remains a buyers’ market, with the government a key player on the supply side. The exchange rate is controlled technically, through a restrictive foreign currency allocation priority list. In this case, the role of an auction system becomes ambiguous, as it adds little to the competitiveness of foreign exchange allocation, in our view,” said Imara.

Past experience in developing countries have shown that  auction markets have not been sustainable over a longer period of time since a number of them have been terminated over the years.

While the reasons for failure are numerous, and usually country specific, in most cases the auction market has failed to ensure the desired exchange rate stability as the authorities have not followed fiscal and monetary policies that would be consistent with exchange rate stability.

Another research company , IH securities, contends that  threat on inflation may come from government’s need to fund the summer crop farming season and civil servant salary increments. Printing money increases money supply, which results in the depreciation of the currency, which feeds into inflation.

“Removal and reduction of subsidies on electricity, fuel and agriculture input schemes will ease the burden on the fiscus. Banks have been brought in to assist with agricultural financing. Fuel subsidies alone accounted for circa US$100mn monthly  expenditure. Zimbabwe’s’ Money supply continued on an upward trajectory, fuelled by the conversion of foreign currency deposits to ZWL on account of exchange rate movements with  broad money (M3) increasing by 552.8% to ZWL 153.8bn as at end September 2020.” Noted IH. FCA Deposits amounted to ZWL 92,1 billion  or 60%, while local currency deposits and currency in circulation constituted the balance

Growth outside of the conversion of FCAs to ZWL, largely reflected increases in credit to the private sector, while banking sector credit to government declined, owing to fiscal consolidation measures. Risks of worse growth outcomes are seen remaining sizeable and will depend on the persistence of the Covid-19 shock and recovery efforts thereof.

Other key domestic risks include a worsening of pre-existing socioeconomic inequities and political instability, which would undermine confidence and hinder effective policymaking while upside risks, stem from the possibility that the government will commit to a reform programme, both politically and economically prompting an upturn in foreign investment.

Chris Louw

https://sashares.co.za/

Featured Financial Writer for SA Shares - Read more about Chris's Bio -

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