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.
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