Due to errant fiscal and monetary policy, consumer prices have continued their relentless climb in July. Just as predictably, our government continues to tout its economic policy as sound and seems to be more interested in deploying short-term, rudimentary measures rather than implementing the right policy mix that would rein in inflation.
Recently, Zimbabwe’s inflation rate hit a new record high, surging to 191%. However, Professor Steve Hanke of John Hopkins University places that figure in the 400% region. Hanke has been using the purchasing power parity (ppp) method to calculate the inflation rate in Zimbabwe since the hyperinflationary period that ended in 2008.
The ppp method compares the price levels between two countries and the result is the actual exchange rate. In 2008 when the government terminated the reporting of official inflation statistics, Hanke and Alex Kwok took it up on themselves to utilise economic models that would get us as close to actual inflation figures as possible.
With fuel, basic food items, and the cost of grain continuing to skyrocket, we have also used the ppp method in our models and our figures correlate with Hanke’s calculations. In fact, a simple visit to the supermarket tells the real story. The government in the past has been guilty of manipulating the exchange rate and no doubt wants to report an artificially lower rate.
Now, here lies the underlying policy problem in Zimbabwe. By reporting an official inflation rate of 191%, the monetary authorities were forced to announce an interest rate hike to a level that is slightly above the former, at 200%. Assuming Hanke’s and EA models are accurate, that would mean the policy rate is futile and will do nothing to tame inflation.
This is the PPP formula. Have a go at it!
Purchasing Power Parity = Cost of good X in currency 1 / Cost of good X in currency 2
(1+ ΔPZIM /PZIM ) / (1+ ΔPUS /PUS) = 1 + ΔEZWD/USD /EZWD/USD
PZIM = the Zimbabwe price level in Zimbabwe dollars (ZWD),
PUS = the United States price level in U.S. dollars (USD), and
EZWD/USD = the exchange rate (ZWD per unit of USD).
In fact, when inflation is higher than interest rates money loses value quicker than what it can grow if deployed in interest-bearing investments/savings. This is called negative real interest rates. The short-term effects can be that people and corporations are discouraged from hoarding money or lending it at key rates (term deposits with banks etc.) and opt for higher rate lending (bonds, commercial papers etc.). Of course, the risk-adjusted rates for these should be higher than nominal risk-free rates + inflation.
According to former Finance Minister, Tendai Biti, for the third time in 14 years that the regime has pushed the economy into hyperinflation territory, and says that those in positions of power are not focused on resolving the crises, but rather focused on the pursuit of the power retention agenda.
Political fecklessness in the face of rising prices is not unprecedented in Zimbabwe. Our policymakers seemingly prioritize political agendas at the cost of the economy. Simply put, the economy comes second in Zimbabwe. The historical record shows what should have been obvious in 2008 – buttons and abstinence do not control inflation. Unfortunately, because our financial branches of government lack independence, they have been unified in response to our current inflationary surge. Instead of political suasion or outright price controls, they are employing inaccurate rhetoric and political scapegoating.
The current administration continues to blame market players for inflation and currency instability. Supermarkets, fast-food chains, and other retailers at large have been purported as some of the major culprits. However, evidently higher prices at supermarkets do not drive-up rents for apartment buildings, the cost of used cars, and the prices for new clothing. Even rising energy costs, which increase the cost of raising cattle and selling groceries, cannot be the root cause of the inflation problem.
The Zimbabwe Stock Exchange has also been a target for supposedly enabling “speculators” and driving the exchange rate disparity in the black market and official rate. If it’s not the supermarkets or the ZSE, then it’s the average Zimbabwean who is at fault for not getting over the remnants of the last hyperinflationary period. Behavioural economics was the root cause of our inflation a few months ago. And before that it was all about the Russia-Ukraine war.
Troublingly, political scapegoating distracts people from the actual drivers of inflation – errant government policies. The Zimbabwean government continues on its spending spree trajectory, driven by desperation to remain in control. Then to plug in the holes of the leaking vault, the deploy elementary monetary policy such as the new gold coin. The gold coin was probably the most potent policy measure announced in the last cycle, but the government has incurred billions of dollars in new debt to shower the economy with all sorts of spending programs with elections only months away.
A majority of this newly issued debt has found its way to the RBZ balance sheet, leading to the creation of billions of dollars in new money. It is this excessive growth in the money supply that was directly injected into the economy that is behind the current inflationary surge.
Since only government policies can cause prices to rise economy-wide, controlling inflation requires fundamental reforms to the current fiscal and monetary policies. The search for scapegoats distracts from these necessary reforms and, to the extent that they delay the implementation of the right policy mix, and unnecessarily increase the real economic costs created by an out-of-control inflationary environment.
Implementing the right policies that will moderate the current surge in inflation should be the government’s top priority. President Mnangagwa hailed 2022 as the “Year of Economic Growth”, but persistent inflation and policy inconsistency is hampering the country from progressing. If the government does not fully dollarise now, the consequences will be dire.
The price of fuel has already exceeded the $1.70-mark price of fuel per litre hit, making Zimbabwe the African country with the highest fuel costs. Lack of access to foreign currency to import wheat and procure fuel for deliveries has seen the price of bread exponentially rising. The Grain Millers Association of Zimbabwe (GMAZ) in April also increased the prices of maize and wheat by 50% and 17.8% respectively.
Further, Zimbabwean health workers went on strike in June after rejecting a 100% wage hike. Public health workers and other civil servants continue to demand US$ salaries dollars as inflation erodes their disposable income and continues to bite.
This article is a lead story in the latest The Axis issue. The Axis is a weekly e-paper published by Equity Axis, with a focus on Business and Macroeconomics. Link to the latest issue XXXV https://anyflip.com/fqcci/coir/