Zimbabwean inflation matrix needs cautious approach

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CAPTAINS of industry have implored the authorities to continue publishing Zimbabwe dollar inflation statistics to enable businesses to plan properly on the cost mixtures of Zimbabwe dollar and US dollar expenditures, despite the marked growth in foreign currency transactions.

This comes after Reserve Bank (RBZ) governor Dr John Mangudya, in his 2023 Monetary Policy Statement (MPS), released earlier this month, urged economic players to focus more on blended inflation since large parts of the Zimbabwean economy had dollarised.

Dr Mangudya cited a recent Zimbabwe National Statistics Agency (ZimStat) report, which indicated that approximately 76 percent of expenditure was now in US dollars, reaffirming the notion that a larger proportion of transactions in Zimbabwe were being done in forex.

“It is . . . important to note that the Zimbabwe dollar inflation is no longer a true representative of the cost of living in Zimbabwe as the country is in a dual currency system where prices and household incomes are also in both US dollar and local currency.

“In this context, Zimbabwe’s inflation needs to be recalibrated to reflect the dual currency nature of incomes and prices in the economy to provide a true reflection of the cost of living in the country,” Dr Mangudya said.

ZimStat said products with the highest proportion of US dollar transactions included furniture and equipment (99,91 percent), clothing and footwear (97,77 percent), transport (92,51 percent), restaurants and hotels (95,57 percent), education (95,38 percent) and health (91,08 percent).

“However, while these are sectoral averages, the ratios could actually differ significantly between individual firms and consumers, as there are still a number of firms with higher levels of exposure to the Zimbabwe dollar while many consumers earn exclusively in Zimbabwe dollars. Thus, while a blended inflation rate makes sense in accurately defining the nature of inflation, it does not take away the need for publishing inflation rates of the Zimbabwe and US dollar, as these are more useful to business for planning purposes based on their income and cost mixtures of US dollars and Zimbabwe dollars,” said CZI.

Zimbabwe’s largest industrial lobby group said it was, therefore, advisable for ZimStat to publish both the Zimbabwe dollar and the US dollar inflation rates every month.

The month-on-month blended inflation rate of January 2023 was 0,7 percent, shedding 0,6 percentage points on the December rate of 1, 3 percent. The RBZ expects a blended month- on-month inflation rate to average below 1,5 percent in 2023.

“While the RBZ has total control over the Zimbabwe dollar inflation rate, it has very little influence over the US dollar inflation rate, even if the US dollar is circulating within the economy.

“Thus, a blended inflation target without a corresponding Zimbabwe dollar target might not be appropriate from policy targeting perspectives, as achievement of the target could be solely based on higher levels of dollarisation in the economy, (hence higher weights on the US dollar in the blended inflation calculation) rather than ability to control the Zimbabwe dollar inflation,” CZI said.

CZI said it was, therefore, important to have an explicitly stated Zimbabwe dollar end-of-year inflation target as it would be more reflective of the direction the monetary authorities expect their interventions to be steering the economy towards.

In line with the RBZ’s forecasts, both annual headline and month-on-month inflation continued to slow down and closed the year at 243,80 percent and 2,4 percent, respectively. The central bank had, in its MPS of July 2022, projected annual inflation to end the year at around 250 percent and month-on-month inflation at 3 percent. The disinflationary trend has continued into the new year, with month-on-month inflation declining from a peak of 30,7 percent in June 2022 to 2,4 percent in December 2022, and 1,1 percent in January 2023. Annual inflation also declined to 229,8 percent in January 2023.

Zimbabwe has a multi-currency regime and the policy stated goal is to move to a mono- currency regime. CZI, however, said Zimbabwe is slowly gravitating towards dollarisation.

It noted that, while full dollarisation could completely eliminate persistent inflation challenges being faced by Zimbabwe, the cost of full dollarisation tended to outweigh the benefits. Among the risks of full dollarisation, CZI said, were economic contraction, as the country would migrate to a high-cost economy, which will make it difficult for local firms to compete on the international market;

The industrial lobby group also cited the curtailing of the central bank’s lender of last resort function as another danger of dollarisation, as the RBZ might not be able to act to assist banks in distress. – Sunday Mail