INFLATION has been an ongoing concern for Zimbabwe for as long as the local currency was in use, but lately there seems to be a glimmer of hope as blended inflation fell in July.
This positive development can be attributed to the appreciation of the Zimbabwean dollar (ZW$) exchange rate, which has helped stabilise prices and ease the burden on consumers. Nevertheless, the recent development is worth interrogating.
Blended inflation is a combination of inflation for prices that are quoted in United States dollars and inflation for prices quoted in ZW$.
The ZW$ based consumer price index (CPI) only measures changes in the prices of goods and services in ZW$ prices, while the blended inflation considers the currency mix in the economy, that is, the proportion of ZW$ used in the economy as well as foreign currency. The inflation measure reflects the overall increase in prices of goods and services in Zimbabwe, accounting for the various components that make up the inflation basket, that is, essential items such as food, fuel, rent, and utilities. One of the main drivers of Zimbabwe’s high inflation in recent years has been the depreciation of the ZW$ exchange rate. As the ZW$ lost value against major international currencies, the cost of imports skyrocketed, leading to higher prices for goods and services. This, coupled with other economic challenges and external factors, resulted in hyperinflation, severely impacting the purchasing power of Zimbabwean citizens.
However, in July 2023, the ZW$ experienced a significant appreciation against major international currencies. This appreciation can be attributed to monetary policy indirectly, and directly to exchange rate developments.
In May this year, the Central Bank tightened its position on money supply to curb exchange-rate loss and curtail inflation. The bank took to the market to mop-up more than the excess liquidity, which induced scarcity of the ZW$ and thus reduced supply on currency markets, which subsequently saw the exchange rate appreciating grudgingly.
The appreciation of the ZW$ exchange rate positively affected prices across the board. The cost of imports, which make up a significant portion of the consumer basket in Zimbabwe, decreased due to the stronger exchange rate.
This reduction in the cost of imports directly translated into lower prices for imported goods, such as food, fuel, and other commodities. Forward pricing was also among the inflation drivers as retailers and suppliers were pricing goods according to a forecasted exchange rate in a bid to hedge value against exchange losses. These were curbed by the sustained currency appreciation and consequently, the general inflation rate fell by -15,3% while annual inflation fell from 175,8% in June to 101,3% in July 2023. Due to ZW$ liquidity constraints, which halted the exchange rate loss that had stretched unstoppable since the beginning of the year, the local unit appreciated by 27% against the US$ to a year-to-date loss of -85%.
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The relationship between exchange rate and inflation is, therefore, imperative in assessing the course of action to be taken by the government in controlling inflation.
The success of the contractionary monetary policy in curbing both exchange rate and inflation also indicatehow the government holds the power to stabilise or destabilise the economy.
It is,therefore,important to note that sustaining this positive trend requires continuous efforts from the government as opposed to external “saboteurs”.
The Zimbabwean government ought to ensure that it maintains the right balance between fiscal discipline and monetary policies.In conclusion, Zimbabwe's blended inflation fell in July 2023 due to the appreciation of the ZW$ exchange rate.
While this development offers hope of stability, sustaining this positive trend requires continued efforts by the government and the RBZ to maintain a favourable economic climate and promotes investment.
- Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_