ZIMBABWE may soon slide back to historic hyperinflationary levels experienced during the aught as the authorities maintain excessive money supply and continue pegging the exchange rate, a new study presented at a high-level economic symposium has shown.
The economy is battling rising inflation, a weakening domestic currency and high levels of unemployment and experts warn that the situation may worsen.
At the height of the country’s unprecedented economic meltdown Zimbabwe’s inflation officially reached 231 million percent in 2007, rendering the domestic currency worthless. To halt the meltdown, the government ditched the Zimbabwe dollar for a basket of multi-currencies mainly dominated by the United States dollar.
According to paper presented by economist Joseph Mverecha at the ministry of Finance-organised Zimbabwe Economic Development Conference held in Victoria Falls this week, stabilising inflation therefore requires, first, policies to collapse the parallel market and inflation expectations.
This paper, titled “Monetary Policy Shocks, Exchange Rate Volatility and Inflation Persistence: Implications for Currency Stability and Inflation”, explores the causes of the exchange rate depreciation and inflationary spiral, applying co-integration econometric techniques and error correction modelling. The paper has some policy proposals drawing from the analysis.
“The inflationary spiral is largely explained by exchange rate depreciation and inflation expectations. In the presence of inflation expectations, the short run dynamics amplify the exchange rate movements in response to monetary shocks,” Mverecha said.
“At the heart of the current challenges are two major recurring problems in macro-economic policy management over the past two decades: excessive monetary expansion; and a fixed/crawling peg exchange rate policy.
“The above combination has and will inherently guarantee high inflation (and hyperinflation, as occurred in 2008, if corrective measures are not implemented). The relationship between money, nominal and real variables has been well documented over the past decades, since Milton Friedman’s treatise in the 1960s.”
The economy is experiencing elevated inflationary pressures, with headline inflation sharply escalating over the past few months. The authorities had made significant progress in reducing annual headline inflation from a peak of 834.1% in July 2020 to 50.2% in August 2021. During the same period, month-on-month inflation decelerated from 35.7% in July 2020 to 2.6% in July 2021.
However, since August 2021, the economy has witnessed a resurgence in inflationary pressures with month-on-month inflation rising from 2.6% in July 2021 to 4.7% in September and 6.4% in October 2021.
Official figures show that month- on-month inflation surged to 7% in February 2022 and 15.5% in May. The annual inflation rate increased from 66.4% in February to 131% in May 2022.
“The signs of inflation build up have been evident since August 2021 (or more precisely renewed inflation pressure), as exacerbated by the sustained exchange rate depreciation,” Mverecha said.
Zimbabwe’s growth path over the past decade has been characterised by significant variability, with positive growth last year following consecutive decline in 2019 and 2020, with domestic growth constraints as compounded by the Covid-19 pandemic.