ZIMBABWE should this month brace for full-impact volatilities from the Russia-Ukraine war as the southern African country battles to tame rising inflation, the country’s manufacturing sector lobby group has warned.
Tremors from the Russian invasion of Ukraine are already spreading across the world, with economies experiencing disruptions of fuel and wheat supplies which are stoking inflation.
Experts say over the past year, there has generally been a lack of confidence on the foreign currency auction market due to its failure to perform the price discovery role. They say the largest source of concern was that the auction rate creates an overvalued local currency. Russia is also the third-largest producer of wheat while Ukraine is ranked 9th in the world. Combined, the two countries account for about 15% of the world’s wheat production.
The Confederation of Zimbabwe Industries (CZI) says the conflict, which began on 14 February, will affect manufacturers, who rely of imports for throughput to push prices.
“Prices of fuel have increased throughout the world due to this conflict and Zimbabwe was not been spared. It is expected that the full impact of the increase in fuel will be felt in April as it cascades down the economy,” the CZI said in its monthly economic report for March.
“Manufacturers and service providers will be expected to adjust prices in response to the cost pressures, as all cost build-ups tend to have a lag effect in the market.
“The war will disrupt supply chains and the challenges in accessing Russian and Ukrainian markets will see the remaining markets being subjected to increased demand, inevitably leading to increased prices. The increase in wheat and associated product prices will also be inflation-enhancing.”
Concerns about overvaluation of the exchange rate was mainly stemming from the fact that the exchange rate was not depreciating in line with the inflation differentials with main trade partners, which is one of the critical attributes expected in a market-driven exchange rate.
“The African Continental Free Trade Area has kicked in and the high inflation rates put the country at a disadvantage when it trades. As at February 2022, Zimbabwe had the highest inflation rate compared to its regional counterparts,” the CZI said.
“This means that the external drivers of inflation are going to have a compounded effect in Zimbabwe compared to other neighbouring countries due to this high base effect.”
Official statistics show that Zimbabwe’s year-on-year inflation for March stood at 72.7% mainly driven by price increases in fuel, electricity and gas.
“There are a number of reasons that can explain the inflationary trends in Zimbabwe.
However, inflation has been traditionally associated with the exchange rate movements, especially the parallel market premium,” the CZI said.
“This means that the exchange rate instability, especially the parallel market exchange rate, remains one of the threats towards inflation management. This also implies that removing of exchange rate distortions to result in a reasonable convergence with the parallel market rate, which is highly correlated with broad money supply movements, is critical.”