Inflation moderated, but cost of living remains too high

THE latest statistics released by Zimbabwe National Statistics Agency (ZimStat) show annual price inflation in September 2022 as measured by the All-items Consumer Price Index (CPI) mounting by 280,4% relative to 285% recorded in August 2022.

From a month-on-month perspective, prices increased by 3,5% in September 2022, down 8,9 percentage points from the August 2022 outturn of 12,4%.

This marks the third consecutive month of a disinflation trend which began in July 2022 when monthly price growth moderated to 25,6% from 30,7% that was recorded in June 2022.

It is also encouraging to note that monthly price inflation plunged into single-digit territory in the month under review for the first time since March 2022 when it was measured by ZimStat at 6,3%.

As highlighted in Zimbabwe Coalition on Debt and Development (Zimcodd)’s August 2022 Economic Review, price moderation experienced since July 2022 is partly attributed to policy actions being undertaken by authorities to tame public panic as well as address excessive Zimbabwe dollar liquidity growth.

For instance, in May 2022, the multicurrency regime was entrenched into law to reduce public speculation around the abrupt return to a mono-currency, that is, exclusive use of the Zimdollar as legal tender.

Treasury also suspended duty on basics to allow those with free funds to import from abroad.

Although this is fuelling dollarisation and crowding-out non-forex earners, the measure is helping to avert acute market shortages, while instilling pricing discipline in some of the profiteering local manufacturers.

More so, government reportedly suspended payments to its suppliers who had adopted forward pricing models and benchmarking prices to front-loaded parallel market rates leading to exorbitant prices charged to the government.

Treasury has since instituted a value for money process to scale up due diligence on all government procurement processes before awarding contracts to eliminate forward and double pricing which drives inflation.

From the monetary front, the Reserve Bank of Zimbabwe (RBZ) set a record high benchmark policy rate at 200% from 80% to curb speculative borrowing in the market which was driving the parallel market rates.

The bank also started targeting tight quarterly reserve money growth to reduce Zimdollar liquidity, which also drives parallel market rates.

Although the selling of gold coins is posing a huge opportunity cost in terms of foregone national reserves, the coins are helping to mop excess Zimdollars in circulation and offering investors an alternative lucrative asset to the US dollar for value preservation.

Consequent to these actions, the parallel market rate has plunged from an average US$1:$850 in July to the current US$1:$700, a 21,4% Zimdollar gain in alternative markets.

However, apart from moderating parallel market rates, disinflation is also attributable to the weakening of the economy.

The highly inflationary environment has collapsed total savings which are generally considered to be the backbone of private sector investment.

In the same vein, chronic inflation, which was largely fuelled by Treasury’s fiscal indiscipline, weak Zimdollar price discovery process and excessive Zimdollar liquidity is subduing aggregate consumer demand.

While the current disinflation is highly commendable, it is still a long way for the cost of living to fall to bearable levels for the majority, particularly those earning exclusively in the fragile Zimdollar.

Price inflationary pressures will likely remain elevated in the second half of the year.

For instance, fiscal spending pressure keeps mounting, jeopardising government financial books, thereby increasing public borrowing as well as quasi-fiscal operations financed through money printing.

Due to the poor 2021/22 agricultural season, food price inflation will keep mounting presumably until the next harvest, which is around April 2023.

Last, but not least, the uncertainty around the COVID-19 pandemic as well as the likely continuation of the Russia-Ukraine war means elevated inflation for perennial importers with inefficient domestic manufacturing firms like Zimbabwe.

Therefore, to sustain price and exchange rate stability, authorities should strive to keep fiscal spending and money growth under check.

There is also need for increased political will to embrace credible, market-driven economic policies and fully implement structural reforms to dampen existing pricing distortions in the market.