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Inflation — Locking stable door after horse has bolted?

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AS the potentially volatile 2023 elections beckon, there is reason for bureaucrats and the ruling elites to worry about an unstable currency and runaway inflation. The government and the central bank are seeking to control these two with fortified resolve, but they may be trying to lock the stable door after the horse has bolted.

DUMISANI NYONI

Inflation, which scaled to 362.3% in January, gained 1.3 percentage points on the August rate to 51.5% in September, according to latest government statistics. Annual inflation had, since the January figures, been on a downward trajectory, but the curve flattened out in July and August, slamming the brakes on the decline.

Just over two months ago, Reserve Bank of Zimbabwe (RBZ) governor John Magudya pronounced, rather triumphantly, that inflationary pressures in the economy had receded, creating what he called “a conducive monetary and financial environment” essential for “robust economic growth in the medium term”.

But there is now obvious panic: A sudden rush in commodity prices, sparked by the plummeting black market value of the domestic currency, forced the central bank governor’s long hand on the market. A number of alleged black market currency dealers were arrested, their bank accounts ordered closed, as well as their mobile cellular numbers, used as mobile money wallets for black market deals. Up until recently, repeated calls to liberalise the managed forex auction system had appeared to have fallen on deaf ears.

A clampdown on business executives followed. Simba Makoni, a former finance minister, is one of the directors who have been hauled before the courts because a company on which he is board chairperson was allegedly using parallel market rates to price its products.

Although the clampdown on market dealers has often characterised attempts to subdue the black market, it has increasingly become vindictive. Mangudya has often promoted monetary policy as an effective tool to bring stability on the markets.

The foreign currency auction system, he said, had “assisted in the discovery of an appropriate and stable market-based exchange rate for the country”. The foreign exchange auction system had been introduced in June 2020, minimising, Mangudya said, “distortions in pricing by curtailing speculative pricing and parallel market exchange rate indexation of prices by businesses”.

“Consequently, the parallel exchange rate premium has reduced to a tolerable band of up to 20%, consistent with experiences in other countries,” he said in February.

Many companies have complained that they have had to wait for months before getting their allocation of foreign currency from the currency auction. As a result, a good number of them have resorted to the parallel market, forcing the black-market value of the local unit to come under pressure.

Reserve Bank figures show that about 28% of the country’s imports are funded by the auction market. The balance of imports is funded from other sources, primarily the parallel market. This has meant that the parallel market exchange rate premium has widened, from the comfortable band to well over 84% last month.

Even as the parallel market rate has moved significantly over the past few months, the official exchange rate, determined by the weekly auction system, has remained range-bound, ending September at a weighted average rate of 87.66 to the US dollar. By comparison, the parallel market rate was already trending towards 200 to the greenback.

“The exchange rate distortions are, therefore, responsible for the inflationary pressure that the country is currently facing,” said Cornelius Dube, the Confederation of Zimbabwe Industries (CZI) chief economist. The costs that businesses incur in obtaining foreign exchange from other sources are largely driven by the parallel exchange rate,” he noted.

In his briefing to CZI members, Dube said the parallel market rate had “been increasingly unstable, driven by demand from economic agents for value preservation”.

The central bank had anchored its projections of a sustained decline in inflation on its “strong monetary policy measures”, anchored on its handle over reserve money growth and a foreign currency allocation based on the auction system it claimed had been perfected.

It insists that annual inflation will fall to desired levels of around 30% by year-end.

Evidently, foreign currency receipts have been increasing, and a US$1 billion windfall from the International Monetary Fund would have bolstered this to weaken the parallel market. Foreign currency receipts between January and September this year amounted to US$6.09 billion, compared to US$4.43 billion over the same period the previous year, according to latest RBZ figures. This represents a growth of 37.8%.

Over this nine-month period, foreign exchange payments via the auction system amounted to US$1 501 541 525. Many companies funded their imports through foreign currency accounts, some of which had mopped up the cash from the market through cash sales to the public. These were, in most cases, priced using the parallel market rates.

Dube said the inflationary scourge has resulted in significant erosion of incomes.

“Only workers who received more than a 50% salary increment over the past 12 months are adequately compensated from the inflation effects,” he said, warning that there was heightened risk of a resurgence in inflation driven by falling confidence as people perceive the battle against inflation as lost.

The effect of this erosion of incomes has been to worsen poverty in the country. This, inevitably, undermines the electoral chances of the ruling party, already squirming from internal fissures, while boosting the profile of the opposition.

At a meeting with captains of industry and commerce early this month to “find solutions to the volatility of the parallel market exchange rates” adversely affecting economic growth and increasing domestic prices, Mangudya said he had committed the central bank to dealing with a backlog of foreign currency allocation on the auction system and ensuring that such a backlog does not recur.

But there was no commitment to end the parallel market. Instead, Mangudya advised retailers to extend discounts to US dollar customers in the normal course of business “as long as they are reasonable and in line with best practice”. Discounts are a euphemism for parallel market rates.

Retailers using the official exchange, such as the big retail chains, could apply “a tolerance premium of up to 10%” in their pricing system. Yet in arresting business executives and currency black-market dealers, the RBZ had sought to impress upon the public that it was dealing with a vice for which it was uninformed.It was.

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