The authorities have practically lifted the moratorium on the publication of year-on-year inflation figures — the evidence is the publication of the October Consumer Price Index (CPI) by the Reserve Bank of Zimbabwe (RBZ) on its website.
The RBZ published the CPI as 402,92 for October. Though the CPI is not the actual year-over-year inflation, the publication of the CPI means one can make a simple calculation for the actual inflation by comparing CPIs for comparable periods, whether month-on-month or year-over-year. Let us de-mystify inflation calculation — the simple percentage change from one CPI to another is the inflation over the period.
When Finance minister Mthuli Ncube placed a moratorium on the publication of year-over-year inflation, the publication of the CPI was also stopped, making it difficult, but not impossible, to calculate inflation. However, the publication of month-on-month inflation made it possible to decipher the hidden CPIs because there is an established mathematical relationship that cannot be banned.
Last week, this column showed how the Finance minister’s year-over-year inflation publication ban argument could no longer be sustained because data he supplied in his 2020 budget statement on real and nominal GDP forecasts and projections subsumed year-over-year inflation, based on the GDP deflator (a Paasche price index).
We also showed that the reason that the ban was meant to enable like-for-like data to be first collected was not methodologically valid as the budget statement leased data that was presumably condemned — damaging the internal validity of the like-for-like argument.
Put simply, we have always had prices for goods – the outlawing of multi-currencies on June 24 in favour of the hastily re-introduced local currency as the sole legal tender could not sustain the like-for-like argument. The point is: the powers that be had the power to ban the publication but could not ban the year-on-year inflation because it is scientifically impossible to do so.
The CPI figures published last week in this column were arrived at independent of the RBZ and other analysts. Our independently deciphered CPI for October is 402,83 — that is practically the same figure published by the CBZ, given the extremely small margin of difference between the two. Treasury has not protested the publication of the CPI by the RBZ.
In practical terms, government has chosen the quiet route of lifting the ban in a subtle manner — strategically not explicitly publishing the year-on-year inflation, but effectively supplying the data needed for companies to make a simple calculation of the percentage movement from one CPI level to another, which is by definition the inflation figure.
Let me illustrate this. The CPI for October 2018 stood at 74,6 and with the CPI for October 2019 at 402,83. This implies a 440% increase — that increase is the year-over-year inflation for October 2019.
Year-over-year inflation is important for the setting of annual cost of living adjustments, determining performance of investments and for preparing inflation-adjusted financial statements. It is the latter, I suspect, which put pressure on government to begin to publish the CPI since the July ban.
International Accounting Standard (IAS) 29 on hyperinflation accounting requires listed companies to publish inflation-adjusted financial statements when conditions of hyperinflation as defined by the standard are reached.
It should be noted that how economists define hyperinflation is different from how the IAS 29 defines it. Economists define hyperinflation as a month-on-month inflation of 50% sustained over a period of 30 days. If we were to use the economist’s definition of hyperinflation, Zimbabwe is technically not in hyperinflation.
IAS 29 states the following characteristics as warranting the adoption of hyperinflationary financial reporting:The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
The general population regards monetary amounts not in terms of the local currency, but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
Interest rates, wages and prices are linked to a price index; and The cumulative inflation rate over three years approaches, or exceeds, 100%.
The Public Accountants and Auditors Board reached consensus in October that the conditions for applying hyperinflation in Zimbabwe had been met. At the time of the announcement, government had ceased the publication of year-over-year inflation figures, making it practically impossible for hyperinflation accounting to be done. Government got itself into a catch-22 situation, where its scientifically baseless decision to stop the publication of year-over-year inflation figures threatened to render our financial reporting meaningless, possibly inviting international condemnation.
With year-on-year inflation banned, listed companies would not be able to apply IAS 29 as there would be no official year-over-year inflation and the necessary CPI bases. Given the magnitude of the PR disaster that would ensue if government dug in its heels and continued with the scientifically invalid inflation ban, risking multi-lateral institutions and the investment communities not taking us seriously, government has to find a less dramatic and embarrassing way of withdrawing its senseless inflation ban.
Government seems to have chosen to let the RBZ publish monthly CPIs, giving companies the basis for calculating inflation-adjusted financial results based on an accepted reference figure to make inter-period and inter-company comparisons valid.
We expect hyperinflation accounting to continue into 2021 as the GDP deflator for next year implied in the 2020 budget statement implies an average inflation of 152% for 2020, meaning the conditions for hyperinflationary accounting will persist in 2020.
Meanwhile, the Monetary Policy Committee forecast a reduction in month-on-month inflation for November. The jury is still out on this — the restoration of the maize meal subsidy by executive order may put brakes on food and non-alcoholic beverages price increases.
Reduction in inflation does not translate to a decrease in prices — it simply means that prices are rising but not as fast as before.A forecast of an average inflation of locally produced goods and services of 152% for 2020 means prices is expected to rise. In fact, a 152% year-on-year inflation is exponential,
meaning that the price rises for next year are expected to be much higher than this year even if the average inflation for locally produced goods and services for 2019 is expected to be 215%. This is what the budget statement implies in terms of the implied GDP deflators it assumes — public statements promising that 2020 will be better are politically correct statements — the official position is hidden in the official data.Truth needs no authorisation.
Happy holidays.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com. This article was first published here in the Zimbabwe Independent.
