Inflation down because of tight monetary policy and improved fiscal discipline


At first glance, nothing much seems to have changed. The “world bank” in Bulawayo is still alive and kicking. Some would even say it is thriving more than ever before. Greed and corruption are still rampant.

But inflation, declared the country’s number one enemy by central bank governor Gideon Gono, is now down to 252 percent, about the same level as it was in April last year. However, while $500 was the highest denomination note and could buy a handful then, it can only buy a sweet today. The drop in inflation is, therefore, difficult to explain to the layman.

When he unveiled his monetary policy in December last year, Gono said: “Zimbabwe’s macro-economic challenges defy attempts to ‘box’ them into some theoretical or traditional economic phenomena as we know them.

“Our inflation levels, for instance, cannot be attributed to simple cost-push/demand-pull forces as we traditionally know them; a great deal of it has to do with such human-behavioural vices such as greed, speculation, negative self-fulfilling expectations, lack of confidence, weakened patriotism and commitment to the country, short-termism, corruption and politics; the treatment of which will require more than a set of monetary and fiscal policies and pronouncements.”

Economic analysts, however, say it was Gono’s tight monetary policy and improved fiscal discipline that was largely responsible for the decline in inflation.

Oscar Chiwira of the banking department at the National University of Science and Technology said while all the vices Gono mentioned in his inaugural monetary policy statement still lurked, his tight monetary policy and fiscal discipline by the government that resulted it in a surplus had helped curb inflation.

“All the vices are still there, but there is simply no money,” Chiwira said. “Because there is no money, there is now a reduction in speculative behaviour. People holding on to assets are now realising that there are no takers. Prices of properties are still high but there are no buyers. Prices will, therefore, have to go down.”

Chiwira said the Reserve Bank of Zimbabwe had managed its money supply properly mopping out all excess liquidity. Another positive was that the government was now in surplus. This on its own inspired confidence, though questions might be raised about whether the surplus was real or not.

“There is now financial discipline within the government. It is no longer crowding out the private sector,” Chiwira said. “Any surplus inspires confidence because ways of financing deficits are inflationary.”

On those doubting the Central Statistics Office figures and the budget surplus, Chiwira said, right now there was no way of verifying the figures. “We simply have to take it as it is. There is a very close link between budget surpluses and declining inflation.”

The Standard Bank of South Africa, which trades in the rest of Africa as Stanbic, said the managed foreign exchange auction system had also contributed to the decline in inflation.

While it expected the central bank to maintain this policy with a gradual relaxation, it warned that this strategy was not sustainable for an extended period as it was likely to impose a cost to production.

The bank, however, said it expected inflation to continue declining to below 200 percent by the end of the year. It was likely to decline moderately next year.

“We expect annual inflation to average 380 percent in 2004 and 120 percent in 2005,” the bank said.

Zimbabwe National Chamber of Commerce president Luxon Zembe said while his organisation applauded the government’s fiscal discipline, it was not time to celebrate yet because it was still not clear whether the surpluses were real or not. But it was a good start.

Zembe said the only way to kill speculative behaviour was to ensure that there were no shortages. “It is a worldwide phenomenon that whenever there is a shortage, there is a spontaneous response to try and cash in on the crisis. This is a natural response,” he said.

While applauding the central bank for most of the measures it has taken so far to transform the economy, Bulawayo businessman, Martin Mabvira accused the bank of just “taking and taking without giving back”.

Mabvira said while the central bank was raking in millions from exporters and through the homelink programme, it was difficult to get foreign currency especially when it was required urgently.

He said he had at one time been awarded a tender to supply parts to a Tanzanian organisation. These parts were required urgently. When he went to Air Zimbabwe, he was advised that the corporation needed US$225 for the airfreight.

Mabvira said when he went to his bank, he was told that he had to go through the auction system to get the money.

“I had been trying to break into that Tanzanian market for three years and here was my chance. I had the goods and my contact in Tanzania wanted to check whether I could really supply the goods.

“I lost out because it took me three weeks to get the US$225. My contact in Tanzania phoned a South African company and had the goods the following day. This is how we are losing business,” Mabvira, a member of the ZNCC told the regional chapter of the organisation at a pre-budget consultation meeting.

Though the central bank has introduced a foreign currency auction for individuals and small companies, now conducted every Tuesday, most people believe the process is so cumbersome that people are forced to resort to the black market because it is not rigid. No questions are asked.

The black market in foreign currency along the “world bank” block is, therefore, thriving more than ever before, especially as people approach the festive season because things are still cheaper in neighbouring Botswana and South Africa despite the high exchange rate on the parallel market.

Observers say the central bank is not likely to kill the parallel market, one of the major drivers of inflation, unless it addresses this supply side.


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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.


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