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The paradox of Zimbabwe's rising prices and falling inflation

by Staff reporter
03 May 2021 at 06:24hrs | Views
FOLLOWING months of scepticism over Zimbabwe's ability to achieve its targeted annual inflation rate, some of the country's leading analysts are beginning to change their
view.

Now, they feel that it is possible to achieve a 10% annual inflation rate by the end of this year, as predicted by the Reserve Bank of Zimbabwe (RBZ) in February.

When the announcement was made by the central bank chief John Mangudya, it was somewhat a shock.

It came after government had projected 136% when Finance minister Mthuli Ncube announced the 2021 national budget in December.

At the time, even the 136% sounded over ambitious.

Mangudya had based his projections on the significant drop in inflationary pressures from July last year, when the annual rate reached a peak of 837,53% before slowing down to 348% in December.

Last week, Zimbabwe National Statistics Agency data showed a continuing downward trend in the inflationary figure, with the rate falling to 194% in April from 240,55% in March.

This represented an 81,04 percentage points decrease from 321,59% in February.

There has been marked progress in the management of inflation.

But at current levels, the country remains stuck in hyperinflation and across provinces, citizens have been struggling to catch up with a price rage that has hit the markets since the beginning of the year.

Still, none had been able to explain clearly why government's data has been showing receding inflation during a period when prices had been rocketing.

But last week, Christopher Mugaga, chief executive officer of Zimbabwe National Chamber of Commerce (ZNCC), told Weekly Digest, an Alpha Media Holdings publication, that there was no way prices would fall when the inflation rate was in the triple digit range.

Mugaga said most of the attention should now be devoted to managing Zimbabwe's volatile exchange rate, the biggest threat to economic recovery.

"The 10% is achievable, but monetary authorities must not suppress the exchange rate," Mugaga said last Monday.

"It must reflect the reality on the ground. If they suppress it, the black market will gain traction and business will get the forex from the parallel market. That will lead to price increases," Mugaga said.

The ZNCC had a point, really.

The price volatility that affected Zimbabwe since 2019 has been underpinned by a stronger black market for foreign currency, compared to official market which had very little to offer.

But it is really dog eat dog on the black market, as only those with the deepest pockets have been able to compete.

But to recoup their expenses, they have passed the cost to consumers when they bring their goods onto the market.

The mathematics is simple.

Those that buy forex on the black market charge high prices.

It was expected that those that have been accessing forex on the official market would sell at low prices.

It has not worked that way.

Every business has been charging the same price, and Zimbabweans have not benefited from the establishment of the foreign currency auction system in June last year.

On why prices are trending northwards when inflation is going down, Mugaga said: "Inflation is still at three digit levels. It is still high. It means prices are still increasing but at a slower rate. So we can't expect prices to go down at that level."

Another economist, Victor Bhoroma, commended authorities for taming inflation.

However, he cast doubts over the 10% target.

"Inflation has remarkably declined from the 838% recorded in July 2020," he said.

"This is commendable progress despite the fact that the consumer basket continues to marginally increase every month. Reaching 10% is highly unlikely considering the fact that the government has upcoming payments for delivered grain and tobacco in the next six months. These payments will undoubtedly lead to growth in money supply and make the 10% out of reach," Bhoroma said.

"The differences could be a result of blended methods being used to calculate inflation and the effect of using the auction rate instead of the open market rate which is used by a number of retailers.

"I do not remember this happening in history as inflation was mainly measured using a single currency or through a liberalised exchange rate."

He urged authorities to allow the exchange rate to be discovered by market forces.

The Zimbabwe dollar, currently enjoying a fair stability, is trading at US$1:$84 on the formal market against US$1, but is selling at $135 on the informal market.

"What needs to be done for economic sustainability is to maintain money supply discipline and move to a managed float exchange rate where price discovery is determined by market forces with minimal control and interference from the government. That way, foreign currency supply to the formal market improves and the value of the local currency finds its correct price," he said.

Last year, the inflation rate ended at 348,5%, remaining the world's second highest after Venezuela.

Ncube had projected it would recline to 336% by December 2020.

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This story was taken from the Weekly Digest, an AMH digital publication

Source - newsday

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