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Inflation on way to faster fall

17 Sep, 2020 - 00:09 0 Views
Inflation on way to faster fall Mr Cross

The Herald

Golden Sibanda

Senior Business Reporter

INFLATION is forecast to start falling at faster pace on the back of a stable and firming Zimbabwe dollar, which has benefitted from the introduction of a systematic currency trading platform and measures to tighten controls on mobile money systems.

Analysts say while Zimbabwe’s inflation remains high on an annualised basis, because of historical factors that affected it since early last year, it was critical to focus on the trajectory of the monthly inflation, which has started trending down since August 2020.

Notably, Zimbabwe’s annual inflation declined to 761,02 percent in August compared from 837,53 percent the prior month, according to the Zimbabwe National Statistical Agency.

On the strength of developments on the foreign exchange auction, blended annual inflation is forecast to gradually fall to 249 percent by December 2020 and further to single digit levels by December 2021.

The positive trends on monthly inflation and the exchange rate thus far have largely been a result of improved formal access to forex on the auction system since June 23, 2020 and tighter controls on mobile money transactions, including limits on merchants and individual thresholds as well as the number of lines they can operate.

It was discovered from investigations that despite being one of most the convenient methods of money transfer and transacting in the 21st century, mobile money had fallen victim to cash barons who used it to trade in foreign currency, which hurt the local currency.

Amid the mayhem that characterised markets prior to the introduction of the forex auction system in June and the cocktail of measures to limit the scope for speculative currency trading, the local currency has fallen from $2,5 to US$1 in February last year when it was first floated post dollarisation.

But the Zimbabwe dollar has recently started firm and it gained 1,2 percent on the US dollar in yesterday’s auctions to reach $81,7076, as allotments went over US$20 million for the first time to reach a new high of US$21,17 million.

The local currency has now gained a total of 2 percent on the US dollar since reaching its lowest point of $83,3994 in the last August auction with small gains in each of the last three auctions.

The auction now meets over 88 percent of importers’ needs.

And so analysts now believe that inflation, the rate at which prices of goods and services go up over a measure period, monthly or yearly, will start falling to reach negative growth by year end.

Zimbabwe enjoyed very low inflation during the multi-currency era 2009 to 2018, which was dominated by the US dollar as the anchor currency, but the Government made the decision to change the base currency, as part of wide reforms to realign fundamentals and ensure sustainable economic growth going forward.

A fall in the inflation rate could cause various benefits for the economy including making Zimbabwean products more globally competitive; increasing exports and growth, increase rates of return for savers, improve confidence, encourage firms to invest and boost long-term economic growth and increase disposable incomes.

“You have to watch the month on month inflation, I see month on month coming down steadily. In August it was 1,4 percent and I am expecting that in September it is going to be negative, as prices will start reducing.

“And at the end of the year it has to be down to single digit levels and for next year we expect very low inflation rate  and might be down to 4 percent or something like that,” economist and central bank monetary policy committee member Mr Eddie Cross said.

Commenting on selected pockets of price increases across the economy, Mr Cross said it was “hangover” on people who still feel as if the economy is still wading in the volatile conditions of the recent past. He also noted that some of the price hikes were unjustified.

“I really can’t see that the price adjustments are justified; I think they are unrealistic. I think that they are using inflation expectations to make money,” he said.

The biggest factor behind the exchange rate and price stability now prevailing in the economy has been the confidence brought about by the systematic access and trading of forex, based on market price discovery, as a result of the auction. Reserve Bank of Zimbabwe (RBZ) governor Dr John Mangudya is on record saying the currency issues and high inflation that have been besetting Zimbabwe since floating its domestic currency last year were largely the problem of constrained production.

“The RBZ continues to bemoan lack of productivity to self-sustain ourselves so that the foreign currency we are using to import maize and wheat is used to feed the auction system,” Dr Mangudya said, adding some of Zimbabwe’s inflation was driven by shortages.

According the governor’s midterm monetary policy statement, the supportive measures put in place by the bank to sustain the auction system, including strict adherence to the monetary targeting framework, suspension of mobile money agents for bulk transactions and improved monitoring of electronic transactions, have started to bear fruit as evidenced by the muted activity on the foreign exchange parallel market.

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