- September annual inflation stood at 51.55 percent from 50.24 percent in August
- MoM inflation rate maintained upward trend to reach 4.73 percent, ahead of government’s target of below 3%
- Exchange rate pressure pushing prices up
Zimbabwe’s annual inflation ticked up in September, ending a 13-months stretch of easing. Zimbabwe’s statistical office announced on Monday that annual inflation as measured by the Consumer Price Index (CPI) closed September at 52% which is 2 percentage points higher than August’s outturn of 50%.
Inflation is calculated using a balanced basket of goods and services sold within the country’s borders. The key categories include food and non-alcoholic beverages, which carry the most weight at 31.3%, other notable categories include housing, water and electricity (27.6%) and transport (8.4%).
Zimbabwe has a long history of battling inflation and in recent periods, inflation reached a highest of 838% in July of 2020, which stood out as post dollarisation high. The spike in inflation followed a liberalization of the exchange rate, which came together with the reintroduction of the Zimdollar in 2019.
The Zim dollar weakness, as it struggled to hold against the USD due to low confidence and high injection of local liquidity, resulted in a sharp rise in inflation. Value erosion came in at a much faster pace as the exchange rate shed circa 85% in value for 2 straight years, pushing most of the population below the poverty datum line.
Incomes were slow to respond thus causing a sharp decline in demand in goods and services resulting in weak corporate performances and higher poverty levels. These factors were clearly captured through the contraction in GDP. Zimbabwe’s GDP eased by an average of 10% per annum between 2019 and 2020.
A good harvest, loosening austerity and firm global commodity prices have helped reshape the country’s economy in 2021. The country’s GDP is now expected to retrace northwards as demand resurges. These factors together with a more prudent fiscus management had enabled a downward movement in inflation.
The turn in inflation northwards, after such a long run of climbdown, is a worrying indicator. Equity Axis analysts believe the outturn is a representation of a weak and unstable underlying economic position. The analysts believe that the exchange rate pressure, emanating from the parallel market, is sure to push prices up again.
While most of the market is accessing USD liquidity via the interbank, the parallel market still plays a major role in the pricing of goods and services. Most players are defying the RBZ directive to charge products in line with the sourcing of forex, thus pushing prices in line with the parallel rate.
A huge auction market backlog has worsened the situation thus necessitating further reliance on the parallel market for pricing goods. As of Monday this week, the parallel rate was seen at 160 which compared to the auction rate of 87, an over 90% premium.
The government had hoped the margin would come off based on the levels of Nostro balances, which have grown significantly since the beginning of the year. Nostro balances have surged from US$1.2 billion at the beginning of the year to US$1.7 billion as at August.
These Nostro balances have, however, not necessarily been utilised to fund local USD needs. Data analysed by Equity Axis shows that only 20% of the total Nostro balances are being channeled towards the auction and interbank markets, leaving out a huge chunk sitting on mostly exporters' accounts.
The inflation rise in September is only the tip of the iceberg if fundamental analysis of the economy is to go by. The surge in base money supply has been disproportionate to the availability of forex and the growth in GDP or production levels. Most instruments remain unattractive in line with the economic volatility and to investors, the only way out is value preservation through the purchase of forex, which further stokes inflation.
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