Connect with us

Support The NewsHawks


Inflationary pressures to persist in 2021



ZIMBABWE’S annual inflation is seen slowing down slightly to 136.5% in 2021 from a forecast average of 435% in 2020, but continued quasi-financing of the fiscal deficit by the Reserve Bank of Zimbabwe means that inflationary pressures will persist.

Somewhat slower currency depreciation following the introduction of a series of foreign exchange auctions will constrain price growth relative to 2019-2020 levels.

An international research firm, Fitch Solutions, in a Zimbabwe economic outlook, said monetary policy will remain challenging despite slowing inflation.

“We believe that monetary policy in Zimbabwe will remain testing in 2021 given still limited FX (foreign exchange) reserves and weak economic growth prospects, before stabilising thereafter. Macro-economic fragility means that monetary policymaking in Zimbabwe will remain challenging over the coming quarters. While the authorities have progressively lifted Covid-19 containment measures, sectors including tourism, non-food manufacturing, mining, financial services, transport and agriculture have been seriously affected by the pandemic, while the IMF (International Monetary  Fund) estimates that about 7.7 million people (approximately half of the population) need food assistance, and at least 1.7 million require additional social protection,” noted Fitch.

Fitch said real GDP will contract by 12.9% in 2020 (following a 6.5% contraction in 2019), and will grow by just 1.3% in 2021, further complicating the monetary policy outlook.

Average annual inflation slowdown at 136.5% in 2021 is expected to reflect a number of factors, including base effects from very high inflation in 2020. However, some modest progress on constraining the pace of currency depreciations is expected.

The government abandoned the previous fixed exchange rate of ZW$250:US$1 in June, instead implementing a weekly foreign currency auction designed to facilitate trade on a more transparent platform.

The government later introduced a second auction, in which participants were able to bid for between US$2 500 and US$20 000 per auction, as against a minimum bid of US$50 000 under the initial auction system, facilitating greater access to foreign exchange for small- and medium-sized enterprises (SMEs).

“This appears to have slowed the rate of currency depreciation somewhat. In our previous update, in early August, Reserve Bank of Zimbabwe (RBZ) data showed the mid-rate (the average between bid and asking prices for the currency) at ZW$80.4/USD. As of November 16, the mid-rate was ZW81,67/USD. However, we expect the parallel market to continue to trade at a considerable discount to the official rate given continued constraints such as low foreign exchange reserves and thus low levels of liquidity in the system, which will make the exchange rate auction system difficult to operate, and continued prioritisation of foreign exchange allocations, by the central bank,” said Fitch.

While the RBZ dictates that companies must display prices in local and foreign currency terms at the prevailing market rate, Fitch said the likely inability of SMEs to access foreign currency at this rate means that a de facto parallel rate will persist.

“Given these various factors, we believe that monetary policy in Zimbabwe will remain testing in 2021 with still limited FX reserves and weak economic growth prospects.

“The RBZ has made a series of substantial rate hikes and cuts in 2020 – for example, reducing the bank policy rate from 25.00% to 15.00% in April, and then hiking the rate to 35.00% at an unscheduled meeting two months later. It has kept the rate on hold subsequently, and we expect it to make a 250-basis-point hike in 2021 as part of efforts to contain inflation,” added Fitch.

Foreign currency reserves are seen remaining around 0.3 months of import cover in 2021, implying that the bank has only limited capacity to shore up the currency by purchasing Zimbabwean dollars on the forex market.