Inflation, prices and wages: The dog starts chasing its tail

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BY MTHANDAZO NYONI
BOLSTERING resilience and innovativeness for sustainable growth was the theme for this year’s annual congress of the Zimbabwe National Chamber of Commerce (ZNCC) held in Victoria Falls last week.

The theme resonated well with the resilient nature of the Zimbabwean business sector which needs to be bolstered and combined with innovativeness to weather the headwinds and ensure sustainable growth.

Inflationary pressures, power and foreign exchange challenges, are among the perennial challenges for the smooth running of business operations in the country.

For instance, Zimbabwe’s annual inflation jumped to 191,7% in June from 131,7% recorded in April, further spiking prices of basic goods and services.

The 60% point movement comes on the back of yet another fuel price hike of US$1,88 from US$1,76 per litre for diesel and US$1,77 from US$1,73 for petrol.

The incessant price shifts have left the government struggling to shore up the economy and President Emmerson Mnangagwa’s promises to implement new measures to stem price increases are failing to contain the pressures.

Local currency on the other hand has been on a depreciation mode, reaching $750 to the US dollar on the parallel forex market. Similarly, the official forex auction and interbank rates have been rising.

Due to the economic crisis coupled with the COVID-19 pandemic and the Russia-Ukraine war, the World Bank has projected that Zimbabwe’s economy will grow by 3,7%, lower than the government’s 5,5% projection.

To support the theme, robust topics such as “Second half of 2022 economic outlook: headwinds and recommendations”, “Currency conundrum: Policy options and recommendations” and “Private sector preparedness for the AfCFTA: Opportunities and threats” were tackled.

During the course of the congress, prominent economist Eddie Cross advised local businesses to tighten their seat belts, warning that the country will likely dive into worse hyperinflation within two months.

“My advice to the business community is to tighten your seat belts, seriously. I do not see the measures adopted in the last few days having any impact at all on the underlying instability on the money market. I think inflation is going to escalate. I project hyperinflation within two months. Hyperinflation is 50% per month,” he said.

Cross said the government was “rolling in money” because for every US dollar liquidated on the auction, the value has gone up three times in the last two months.

“Remember 25% of the revenues in the government is in US dollars. So I forecast high levels of inflation for the rest of the year in local currency. You must not forget that in US dollar terms, the inflation is only about 2% or 3% and 75% or more of all transactions in Zimbabwe today are conducted in US dollars.”

He implored the business community to collaborate and formulate a policy proposal which can help solve the current economic problems.

“The way things are happening at the moment, the solutions being tendered are not addressing the fundamental issue,” he said, adding that the challenge in Zimbabwe was the foreign exchange market.

Cross noted that the country needed to sort out the agriculture sector, which is regarded as the backbone of the economy.

“We need to sort compensation to our farmers, solve the question of stability and leasehold rights, financing and marketing. All of that is in complete shambles. I am working with the government in trying to reorganise the agriculture value-chain,” he said.

“I have never seen such a mess, loaded with corruption, poor pricing and under-invoicing of exports. Those guys are doing it and we need to sort these things out because unless we fix that, there is no future for agriculture in Zimbabwe.”

Cross also warned against re-dollarising, saying businesses would not be able to compete with regional peers as the African Continental Free Trade Area kicks in.

“If we do not have our own currency we will not be able to compete. If we are re-dollarising right now, the Zimbabwean dollar is dead. It has no value in the marketplace,” he said.

“If you do not have your own currency, we know from the government of national unity (GNU), you are not competitive.”

ZNCC president Mike Kamungeremu said government should come up with measures to strengthen the local currency.

“We expect more confidence-building measures, and confidence in our currency is the starting point. My worry is that even the previous statement from the minister (of Finance Mthuli Ncube) did not address that. For example certain taxes are still needed to be paid in foreign currency when we have a local currency,” he said.

“I thought we are on a de-dollarisation roadmap and I thought, since President Emmerson Mnangagwa announced in May this year, taxes, levies and royalties are to be paid in local currency.

“Unfortunately as we speak right now, that is not happening, we are still required to pay in foreign currency contrary to what the President said,” Kamungeremu added.

World Bank Zimbabwe country manager Marjorie Mpundu said government should put more effort in ensuring price and exchange rate stability to avoid derailing economic recovery.

“In an environment of slowing growth and rising inflation, we need to start focusing on price stabilisation to avoid derailing the recovery,” she said.

“The immediate challenge is to ensure price and exchange rate stability. Global experience shows that instead of providing subsidies and other distortionary measures to mitigate the impact of higher energy prices, it is better to provide targeted support to the poor and use the opportunity to encourage greater efficiency and accelerate the transition towards low-carbon energy sources.”

“Given the increased fiscal pressures, it is important to protect long-term growth by ensuring adequate investment in social protection, education and health.

“And finally, simplifying business regulation and improving trade facilitation will benefit any future growth,” she said.

Mpundu said the economic outlook for Zimbabwe looked positive amid downside risks.

She said the risks to the outlook were significant due to heightened global risks.

Domestic risks also weighed on growth performance and were linked to climatic shocks, and expansionary fiscal and monetary policy, thereby delaying economic recovery, she said.

The WB also projected that poverty levels will further decline in 2022, albeit marginally as conditions for a good harvest deteriorate.

But Reserve Bank of Zimbabwe governor John Mangudya remained upbeat, claiming that the recent official exchange rate adjustments will help in mopping up excess liquidity in the market and stabilise the currency and inflation.

“Recent official exchange rate adjustments will help in mopping excess liquidity and thereby stabilise the exchange rate and inflation in the outlook period,” he said.

“Decisions by the MPC [Monetary Policy Committee] to pursue a positive real interest structure are expected to support stability of the exchange rate.

“The interbank willing buyer willing seller is now the benchmark price of forex in the economy.

“The forex auction system will continue with the auction rate being informed by the willing buyer willing seller exchange rate. Interbank forex system is constrained by lack of trading amongst banks due partly to compliance and geopolitical crisis.”

The governor said confidence building was a process and measures being taken by the government and the central bank were designed to address negative sentiment affecting economic dynamics.

“We need to work together to reduce speculative pricing models as these are not good for the economy, they are inflationary business models and not sustainable.

“We are punishing ourselves and the consumers, they further erode and undermine business confidence and are therefore counterproductive,” he said.

“Current strong economic fundamentals, coupled with recent policy measures will foster a positive economic outlook.

“Consequently, the current dual currency (multi-currency) system is the most appropriate payment and transacting system for the country. It is the best of both worlds. Let us all jealously guard it. It is good for everyone.”

Mangudya also reiterated that the balance of payments position was strong and the country was generating adequate foreign currency, with US$9,7 billion received in 2021 against foreign payments of US$7 billion.

“The foreign receipts for 2021 are the highest ever since. The country has so far received foreign currency amounting to US$4,5 billion as at May 31, 2022, around 34% increase from the same period last year.”

About US$1,7 billion is sitting at the banks while US$1 billion is in reserves.

Mangudya said money supply has been under check with reserve money stable at around $29 billion since March 2022. Fiscal consolidation is also in place — no borrowing from the central bank, he said.

“Exchange rate volatility is, therefore, not a result of weak economic fundamentals. Instead, confidence is being affected by the strong appetite to hold onto US dollars for store of value as a defence mechanism to hedge against past experiences of hyperinflation and loss of value due to currency reforms, resulting in speculative pricing behaviour by business and general market indiscipline.”

The central bank chief said there were two demands for forex and these were import demand and store of value demand.

Energy and Power Development ministry secretary Gloria Magombo implored industry to retool and invest in energy efficiency, warning energy prices were going up.

Officially opening the annual congress, Industry and Commerce minister Sekai Nzenza said government was aiming at reversing the importation of raw materials to focus on value-addition, which promotes local production.

She said the country had adopted the value-chain approach to encourage economic growth.

“Zimbabwe has adopted the value-chain approach learning from international best practice as we endeavour to attain our national industrial objectives. Indeed, greater strides are being accomplished in different sectors as we take a value-chain centred approach in industrialisation,” she said.

“We aim to reverse the importation of raw materials and focus more closely on value-addition where we promote local production. Of course, as a government, our role is to facilitate and create that enabling environment where business can thrive. We are looking at the ease of doing business and already we can see some changes,” Nzenza said.

The minister said government was working hard to improve ease of doing business in the country, particularly on the border posts

With the global pressures filtering into the domestic economy, Nzenza said it has been difficult to predict future prospects.

The minister said as a ministry they were concerned by the rise of prices, particularly of basic goods.

Police spokesperson Assistant Commissioner Paul Nyathi challenged Parliament to review some of the laws dealing with economic crimes, saying the current statutes were “weak” to enforce.

Nyathi said due to “weak” laws, police were failing to deal with illegal money changers blamed for the collapse of the local currency.

“You will find a briefcase company or a fake company, which has no CR14 form (a document that gives details of the directors and secretaries of the company) and is not registered with the Deeds Office, operating 300 accounts, taking deposits and not offering physical products or a service,” Nyathi said.

“They are trading and at one point have $1 billion in their accounts which they take from people then they take this money to the parallel market to look for United States dollars. We have some of these companies.”

Nyathi said currently, there are 28 entities which are on the radar of the police and other stakeholders including the Reserve Bank of Zimbabwe and Zimbabwe Revenue Authority for operating illegally.

“They do not pay tax, they do not contribute anything and they are not members of the ZNCC or the Confederation of Zimbabwe Industries but they are saying they are in the Zimbabwe financial system taking money,” Nyathi said.

The police spokesperson said for investigations to proceed smoothly, Parliament must constantly review some laws because “some of our laws make it difficult when it comes to policing, especially issues of economic crimes.”

“Some of our laws are weak because if you go to Copacabana in Harare and Egodini in Bulawayo, you will find people standing in corners with huge chunks of Zimbabwe dollars and when you arrest them, the courts they will tell you that you do not have a tight or sustainable charge,” he said.

“The only option available for the police is to charge them for blocking pavements.

“So they get away with a fine and our fines are not being reviewed.

“Surely, in an economy like ours, how can people pay a fine of $500 or $1000?

“That is why I want to challenge our Parliamentarians to assist in the maintenance of law and order in the country.

“Let us have deterrent fines. Our fines are pathetic to say the least.”

Government has been cracking down on illegal foreign currency traders, issuing statutory instruments, but with little success.

For instance, in mid-September 2021, the Reserve Bank of Zimbabwe ordered banks and mobile money operators to freeze accounts of over 30 individuals it accused of facilitating illegal foreign currency trade via mobile platforms and social media.

This came one year after government banned mobile-money services, accusing EcoCash of fuelling forex black market.

Officials at the central bank alleged that the EcoCash platform, which boasts of 11 million users, contributed to the country’s spiralling inflation by facilitating illegal foreign-currency dealings.

Government later allowed mobile money users to continue using EcoCash services, but only if they abided by the weekly and monthly transaction limits imposed on them.

Nevertheless, mobile money agents remain banned.

Nyathi said people behind illegal money changing business in Zimbabwe were highly-connected.

  • This article was taken from the Weekly Digest, an AMH digital publication.