‘Lack of a clear de-dollarisation roadmap driving inflation’

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People queuing to buy cheaper foreign currency at a bureau de change at Karigamombe building

BY TATIRA ZWINOIRA

INDUSTRY lobby group Confederation of Zimbabwe Industries (CZI) has said that lack of a clear de-dollarisation roadmap was driving inflation in the country and breeding macroeconomic challenges that are pointing the economy towards full dollarisation.

Prices of goods and services have been on the rise over the past few weeks as the Zimbabwe dollar continues to weaken against the US dollar.

This has seen businesses preferring payment for goods and services in US dollars, with players often offering huge discounts for the US dollar while others reject the local currency.

“The multi-currency regime was brought back as a relief measure to mitigate against the effects of Covid-19,” part of CZI’s January 2022 Inflation And Currency Developments Update (Macro-Economic) Briefing Note to CZI’s members released last week read.

“However, without a clear roadmap towards de-dollarisation, some expectations towards full dollarisation are beginning to emerge. There is a need for the exchange rate situation to be addressed quickly to ensure that the local currency is preserved.”

Exchange rate premiums have grown significantly from an average of 36% in January 2021 to 91% by January 2022, the CZI said.

At the end of January, the official foreign currency exchange rate on the Reserve Bank of Zimbabwe auction stood at US$1:$115,42 while on the parallel market the US dollar was trading at $240.

It is this disparity between the official and unofficial exchange rates that is driving inflationary pressure on the market as businesses are raising the prices of goods and services to preserve value.

As prices increase, employees earnings have failed to keep up with inflation, eating into disposable incomes and increasing poverty in the economy.

“Thus, inflation worsens poverty, and it works against the government efforts to end hunger and poverty in its pursuit of sustainable development goals and agenda 2063,” part of the briefing note under review read.

CZI said the economy had commenced 2022 with a formidable task to tame inflation to levels consistent with policy targets and to align policy with public expectation.

“The policy expectations of a reduction in inflation rate in 2022 to an average of 32,6% from an average of 143,27% in 2021 can only be achieved if there is an observable drift in trends across any two consecutive months,” part of the briefing note under review read.

“Only a reduction in annual inflation by at least 3,4% points each month in 2022 will be consistent with the policy objective of a 20% end of year inflation rate in December 2022”.

CZI said a month-on-month inflation figure of above 5% was of great concern for an economy like Zimbabwe as it is recovering and adjusting towards normalisation.

“Year-on-year inflation for January 2022 was 60,6% which was only 0,1% points less than the December 2021 rate of 60,7%. The picture was generally expected, given that there were no major new disinflation programmes between December 2021 and January 2022, hence the inflation figures for these two months are almost similar,” part of the briefing note read.

“Further delays in action might see the situation getting worse in the following months as inflation expectations take hold.

“This means that there must be very decisive measures in the direction of narrowing inflation expectations and closing the current rally between the official and parallel market exchange rates in the remaining 11 months to ensure that annual inflation falls to the envisaged targets.”

CZI added that following the principles of a proper Dutch Auction system could also help reduce inflationary pressure.

Currently, the RBZ forex auction system has failed to meet demand with huge backlogs of as much as three months having been reported.

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