Spectre of inflation looms

Spectre of inflation looms
Finance and Economic Development Minister Patrick Chinamasa and the Reserve Bank of Zimbabwe governor, John Mangudya

Finance and Economic Development Minister Patrick Chinamasa and the Reserve Bank of Zimbabwe governor, John Mangudya

A LOCAL entrepreneur this week dejectedly remarked on a social media platform: “Checking the price of game fencing and there has been a quantum leap in prices — from $115 to $190. This is truly Hagar the horrible.”
Except the clueless comic character gives laughter and, in the words of his creator, is simply devoted to his family — raising the kids, paying bills, drinking the occasional brew and answering to his wife.
The leap in prices since the introduction of bond notes in November has been truly horrifying, and many fear the situation could deteriorate to the levels of an inflationary crisis that peaked in 2008 and forced government to abandon the country’s defenceless currency in 2009 for a hard currency regime that is now wobbly.
Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, last week said the resurgence of inflation was “a result of the expansionary fiscal policy stance which saw the fiscal deficit rising to $1,4 billion in 2016”.
Initially, the budget deficit had been projected at $150 million in 2016, but had uncontrollably leapt to $1,4 billion, nearly 10 percent of gross domestic product.
The annual headline inflation rate, which had been in deflation since September 2014, moved into positive territory from -0,65 percent in January 2017 to 0,31 percent in June 2017.
Mangudya said during his monetary policy review last week that money supply growth had spurred the surge in inflation, which is wreaking havoc on the welfare of millions of Zimbabweans struggling to make ends meet.
The growth in money supply, he said, was principally the huge government deficit.
Mangudya said the fiscal deficit had emanated mainly from drought-related expenditures, legacy debts and agricultural expenditures.
The major problem, apparently, was that this had been financed largely using domestic sources, mainly through the issuance of Treasury bills and an RBZ overdraft facility.
“This increased the quantity of money in circulation,” said Mangudya.
The consequences have been grave, with food prices accelerating sharply as represented by the year-on-year food inflation rate, which rose from -0,30 percent in January 2017, to 1,92 percent in May 2017.
In June, the country’s largest supermarket chain, OK Zimbabwe, said its internally tracked average food inflation had vaulted to four percent in March 2017, up from -5,3 percent in the same period last year.
While Mangudya argued that food inflation had largely been spurred by intermittent food shortages before the harvesting period, he admitted production constraints in the food manufacturing industry had equally triggered a spike in food prices.
Indeed the prices of some food products have somewhat eased in the past few weeks, resulting in a deceleration of food inflation to 1,82 percent in June 2017.
This also reflected increased grain output.
“The 2016/17 bumper harvest is expected to dampen food prices. On account of the good agriculture season, significant price declines were recorded for bread and cereals, meat, fruit, vegetables, oils and fats, and milk, cheeses and eggs in June 2017,” said Mangudya.
Yet the major threat comes from poor productivity. Local manufacturers are failing to ramp up output due to antiquated machinery. Increased government borrowing has crowded out the private sector, which has been unable to borrow to fund both working capital and capital projects.

Zimra chairperson Willia Bonyongwe

Zimra chairperson, Willia Bonyongwe

Domestic credit recorded an annual increase of 21,10 percent, from $6,978 billion in May 2016 to $8,451 billion in May 2017. The growth was largely due to a 38,67 percent annual expansion in net credit to government, against a modest growth of 1,99 percent for the private sector, from $3, 42 billion in May 2016 to $3,49 billion in May 2017.
Mangudya projected annual average inflation at between two percent and three percent this year.
“The (central) bank shall continue to monitor and manage downside risks to inflation,” he said.
Yet before his monetary policy review last week, Mangudya had complained that inflation was still very low and had to go up in order to stimulate growth.
This contrasted a warning by Willia Bonyongwe, the Zimbabwe Revenue Authority’s board chairman, who said last month that inflation threatened to derail economic revival and export growth.
She warned that there were “serious inflation pressures in the economy”, largely driven by the shortage of foreign currency, multi-tier pricing by traders and resurgence of the parallel foreign exchange market, among other factors.
“Retailers and traders in general are still putting enormous mark ups for local and imported goods. The cost structures need to be revisited urgently in order to curb the inflation drivers and avert a return to hyperinflation. This will be even worse because of the multi-currency usage,” Bonyongwe warned.
The International Monetary Fund has warned that inflation would rise in line with money creation and increasing import prices due to the controls.
“Annual average inflation is set to be two to three percent, which implies an increase to about seven percent by year-end,” said the IMF in its latest report on Zimbabwe.
The World Bank has also forecast a spike in inflation, projecting the rate at 3,2 percent by end of the year.
A rise in inflation would further erode disposable incomes, which are already depressed due to high levels of unemployment in the economy caused by company closures.
Many people have resorted to the informal sector for employment, but incomes are too low and unreliable.
The IMF has projected that fiscal deficits would continue at a higher than optimal level, forcing some monetary financing to continue.
“But the authorities, conscious of the risks of hyperinflation, will restrain the issuance of bond notes,” it said.
Mangudya said he would inject a further $300 million in bond notes into the economy, above the $175 million already printed under a $200 million facility supported by the African Export and Import Bank.
The inflationary consequence of this remains to be seen.

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