Is the legacy of the past political economy revisiting Zimbabwe?

by Sunday News Online | Sunday, Aug 26, 2018 | 361 views

inflation (1)

Bongani Ngwenya
ZIMBABWEs’ inflation stood at 3,52 percent by end of January, and has risen to 4,29 percent by the end of July having escalated from 2,91 percent in June.

At the rate the inflation seems to be rising, it will not be surprising to see the inflation rate hitting the double digit levels sooner than we expect. The phenomenon resembles the archetype of the past.

I remember, for example, when the country started having fuel shortages we all as a nation stood aloof and watched the phenomenon unfolding, and fooled ourselves that the developments were just temporary, and the economic fundamentals were going to correct themselves.

The same happened when the country’s inflation started running away leading to the hyperinflation of the 2008, we were all watching as a nation and wondering what was happening.

Often in situations of lack of prudent economic planning, when economic fundamentals start showing up in the manner the country’s inflation rate is trending from the last quarter of 2017 to the present levels, the ghosts of past failures remain as a systemic legacy, that unfortunately tends to influence current decisions, or failure to institute prudent measures.

The intention really is not to raise any alarm, but to simply conscientise, ourselves on the impact of economic fundamentals as indicated and measured by figures, small and negligible, as they may seem.

I am not at all suggesting that the situation could deteriorate to the same or similar proportions of the 2008 hyperinflation experience. However, these are symptoms of economic fundamentals that are not sitting correctly.

Certainly, the situation requires the attention of the monetary authorities. Embedded in these reported inflation rate figures of 3,52 percent, 4,29 percent, 2,91 percent is a huge story surrounding the performance of the country’s economy.

Economic fundamentals do not lie. In the past, we used to call them, “book economics” and ignored their significance in their economic implications and meaning to our own peril, and what happened next was the experiences of 2008.

It may be partly true that the notable significant leap in the inflation rate of 2,91 percent in June to 4,29 percent in July is attributable to huge public expenditure on the just ended national elections, necessary though, but certainly non-productive and inflationary has caused this phenomenon bearing in mind the fiscus challenges that the country is facing.

In the presence of the sovereign currency, the monetary authorities would possibly been able to manage the inflation rate at certain levels by exercising the necessary monetary policy interventions and measures such as open market operations.

However, in the current absence of the sovereign currency situation, intervention through lame duck monetary policies is not adequate to fully control the impending or threatening inflation. On a comparative note, the country’s exports remained subdued over the same period while the imports were relatively high.

This structural phenomenon indicates that the country’s domestic and industrial capacity still remains subdued to reduce the import bill to sustainable levels.

While it may be true that the cost of doing business and production is high in Zimbabwe, it is my opinion that the inflation has little to show for cost-push effect, but a combination of demand pull effect and pricing distortion in a multi-currency economic environment.

There is high demand for imports, high demand for financing public recurrent expenditure and the blotting budget deficit. Zimbabwe’s economic challenges are multifaceted.

The abandonment of the domestic currency in preference of the multi-currencies has caused the liquidity problem in the economy bearing in mind that these multi-currency reserves can only be generated through export earnings.

On the other hand, the country’s capacity to finance the fiscus has been curtailed by the informalisation of the economy and deindustrialisation over the years. Imports come with a component of imported inflation that combines with domestic pricing distortion and black market exchange rate disequilibrium between the bond notes and the US dollar.

The bond note has continued to be discounted on the black market. So far, the Reserve Bank of Zimbabwe has not come up with any measures to curb the inflation. The prices of basic commodities are escalating, further eroding the consumer incomes purchasing power.

In a normal full employment and full production economy, the scarcity of liquidity in the economy would be expected to put pressure on the prices of goods and services to go down. The current situation is the opposite, owing to a number of factors.

The most notable being the structural challenges that come with the adoption of the multi-currency regime, the unsustainable negative trade balance, among many factors.

In conclusion, I believe it would be prudent for the monetary authorities to institute measures now to curb the inflation from trending beyond the single digit levels.

Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow. He can be contacted at nbongani@gmail.com

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