World Bank warns against exchange crisis

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BY MTHANDAZO NYONI in Victoria Falls
THE World Bank (WB) says Zimbabwe should put more effort in ensuring price and exchange rate stability to avoid derailing the country’s economic recovery.

The country’s annual inflation jumped to 191,7% in June from 131,7% recorded last month following a spike in the prices of basic goods and services.

The depreciation of the Zimbabwe dollar has accelerated in recent weeks, reaching $750 to the US dollar on the parallel market.

Similarly, the official forex auction and interbank rates have been rising.

The WB has projected that Zimbabwe’s economy will this year grow by 3,7%, lower than government’s 5,5% projection.

“In an environment of slowing growth and rising inflation, we need to start focusing on price stabilisation to avoid derailing the recovery,” WB Zimbabwe country manager Marjorie Mpundu told delegates during the Zimbabwe National Chamber of Commerce 2022 congress in Victoria Falls on Wednesday.

“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 weigh on growth performance and were linked to climatic shocks, and expansionary fiscal and monetary policy thereby delaying economic recovery, she said.

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

“For 2022, we project that Zimbabwe’s economy will grow by 3,7% on par with the regional average. I know there will be questions about whether we are revisiting this projection and let me just pre-empt that, we will wait until maybe our annual meeting in October to revisit that number,” she said.

“For 2023, we expect growth in Zimbabwe of about 3,6% but again remember what is happening globally. That may impact these numbers. On the negative side, however, higher prices of key intermediate inputs are increasing the cost of production.

“Electricity, fuel and fertilizer prices have gone up by triple digit rates in a year, pushing price levels very high.”

Mpundu said high inflation affects the purchasing power of households and therefore, reduces consumption.

Increased prices and exchange rate volatility also affect investment decisions which are usually postponed.

She said disinflation policies in the past were successful to bring down inflation up to a very low number in 2021 but acceleration of currency depreciation and the global price dynamics have already reversed these gains.

“Global price dynamics are also not favourable in Zimbabwe. Indeed that gold and nickel are expected to grow this year but these gains will be offset by losses from imports of fuel, food and fertiliser. Also, the projected decline in major prices in the next two years will strain the balance of payments and reduce fiscal revenues,” she said.

Mpundu said the higher food prices this year and overall inflation levels strain further the budget and worsen the situation for the extreme poor in Zimbabwe.

She said this would require increased budget support for social protection to mitigate the impact on the most vulnerable groups of the population.

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