Inflation growth undercuts government’s ambitious budget

Professor Mthuli Ncube’s much vaunted austerity plans appear to be off the rails following the announcement of another surge in the inflation rate. The year on year inflation rate for the month of November 2018 as measured by the all items Consumer Price Index (CPI), stood at 31.01%, a gain of 10.16 percentage points on the October 2018 rate of 20.85%. The significant growth of the rate underlines the weakness of the general economy and officials’ poor grasp of the fundamentals.

That there is a 10.16 percentage point increase in November against the 15.5 points jump seen in October 2018 should not been seen as a consolation.  The inflation growth is proof that the economy might be galloping towards another period of hyper-inflation.

Zimstat said ‘the year on year food and non alcoholic beverages inflation prone to transitory shocks stood at 42.71 % whilst the non-food inflation rate was 25.40%.”

Following the budget statement, government projected the inflation rate to close at 25,9% in 2018 from an initial budget target of 3,01%. Further, Ncube announced plans to stop unplanned expenditures as well as ending government’s overdraft facility at the RBZ as strategies of fighting inflation. 

A week later, the minister announced a primary budget surplus of $29 million for the month of October as evidence that government was walking the talk when it comes to fiscal reforms.

However, the growing inflation rate raises a red flag about the genuineness of government reform efforts.   Government had anticipated inflation growth of 5 percentage points for the remaining two months of the year, yet in the month of November alone, it surged by 10 percentage points.

We are already midway through December and there has been not been anything or an important change in the economy to suggest that the inflation rate will drop. 

Prices will remain very high but perhaps more importantly, they will continue to increase. The parallel market exchange rate which remained stable throughout the month of November has been slowly growing and that further fuels price increases.

However, after the festive period, demand for foreign currencies will soar when companies re-open and consumers’ demand rise. During that period, parallel market rates are expected to surge and the knock on effect will result in even higher price increases.

With rising costs, government will not be able to stick to its 2019 budget targets as they will become more unrealistic as the year progresses.  Already the crippling strike by doctors is already highlighting the challenges that government will face in the coming year. Doctors are pressing to be paid their salaries in foreign currency as one of their key demands but government has so far refused to accede to this demand because it has no capacity to do so.

The bulk of the civil service might join striking doctors as their salaries are eroded by inflation. It is plausible that at some point government will resort to TBs or currency printing in order to placate restive civil servants, among them soldiers.

Unless by some miracle chance the country gets a financial bailout, there will be carnage in the economy. Meanwhile,  inflation growth once again puts the spotlight on government’s increasingly absurd insistence that there is parity between the US dollar and RTGS/bond dollars.

Prior to the introduction of bond notes, the inflation rate had remained below 5% for more than 7 years. That the economy began to see a substantial inflation growth after the bond notes were introduced really points to a disparity between local currencies and the greenback.

It remains to be seen how much longer foreign currency earners will continue to accept the RBZ prescribed forex retention ratios as these are crippling their operations. While government mobilizes a bulk of its foreign currency needs through the retention ratios, which are skewed against exporters, the foreign exchange generated from such exports remains inadequate to meet the country’s needs. For instance, the Grain Millers Association says the country’s wheat worth $12.2 million remains stuck in Beira, Mozambique because the central bank has not availed the foreign exchange required to pay for it. Fuel companies are asking for more allocation of foreign currency to meet the growing demand.

Businesses and individuals that fail to get allocations from the central bank are then forced to source on the parallel market where the premium continues to grow. The premium is simply passed on in the form of higher prices and this cycle repeats itself to a point when growth of inflation reaches hyper inflation levels.

Once that point is reached, government will not be able to stop or control inflation until something fundamental occurs, change in government or perhaps a GNU as was the case in 2008.

Nonetheless, there is still time for Zimbabwe to halt its descend if it adopts some of the recommendations made by various players prior to the budget.