Zim inflation finally falling

Zimbabwe has seen persistent hyperinflation, and found it much harder to eradicate than was thought early in 2004 when the then very new Reserve Bank of Zimbabwe Governor, Gideon Gono, launched a crusade against what was seen as a scourge.

Gono’s direct attack on inflation seemed to produce results, and by early last year the annual rate had been brought down to just under 125 percent, providing some relative stability for hard-pressed Zimbabweans.

But this seemed to be just a respite for in April it started rising, and rising.

Gono’s original attack had centred on banking reform and the removal of some of the speculative pressures in the system.

This did have the effect of reducing runaway growth in money supply, fueled by the private sector but subsidised by the Reserve Bank through its very low overnight accommodation rates for new banks, some of which were simply machines to create vast personal fortunes for a very few while leading their depositors down the garden path.

But those reforms did not, in the view of several economists, go far enough.

The foreign exchange retention scheme and an over-controlled exchange rate allowed pressures to build up in the economy that, when the dam wall finally broke, fed a surge of inflation that dwarfed the disaster of 2003.

A second, unexpected problem, was the dramatic growth in Government spending, without a similar growth in tax income, when drought and a poor harvest, worsened by the international increase in petroleum prices, forced deficit funding on a grand scale.

In effect the Reserve Bank printed money to allow the Government to buy food to give to those who had nothing.

Importing food, and the need to pay off critical arrears to the International Monetary Fund to avoid the total loss of Zimbabwe’s credit rating, put intolerable pressure on the exchange rate.

But the new dip in inflation rates is a sign that new, and more far-reaching, reforms are starting to take effect. Government spending is under better control, with the national debt, in real terms, actually dropping.

Even the much criticised April pay rise for civil servants was non-inflationary; purchasing power rose to around 90 percent of the levels of 12 months before.

While the pressure on the exchange rate is still intense, it is not as bad as it was.

A far better harvest has reduced dramatically the need for food imports and the world rise in metal prices, largely the result of Chinese and Indian demand, has helped Zimbabwe’s export earnings.

The liberalisation of fuel imports has not only improved availability, it has also ensured that prices of petrol and diesel are realistic, without subsidies, eliminating a lot of waste and reducing demand for imports.

Lowish interest rates, about one third of inflation, in money markets is mopping up and, in real terms, destroying some of that printed money from last year.

Already foreign currency is becoming harder to sell on the black market; fewer people have money to spend on it.

The drop is also important in creating an expectation of lower inflation, although until rates go negative there can be no drop in prices.

The expectation of ever worse inflation fueled inflation rates, as companies and individuals brought spending forward, often borrowing money at ridiculous rates or paying way above the purchasing-power-parity rate for foreign currency.

While Zimbabwe’s hyperinflation is unique in Southern Africa, with only the DRC having seen anything comparable in Mobuto Sese Seko’s day, it is not the worse case in modern history.

What happened in Germany, Hungary and some neighbouring states in the early 1920s still holds the golden palm for inflation, when prices could double in less then a day.

In later years Brazil, particularly, and some other Latin American countries saw worse inflation, and Israel in the 1970s and 1980s underwent a burst of inflation that caused more damage than all the Arab armies.

The problem these countries faced, and Zimbabwe faces now, is how to whip inflation without destroying the economy.

Both the Government and the Reserve Bank would like to see a soft landing, and inflation ended over a period, rather than a sudden end to inflation by closing down the economy.

Both Gono and Finance Minister Herbert Murerwa are expected to give policy statements this month, on monetary and fiscal policy.

There has been far wider consultation than before and, it has been reported, far closer liaison between ministry and central bank on crafting a real joint approach.

Those expecting some sort of magic wand to be waved will be in for disappointment.

The problem is not that simple. Just one example: many say Zimbabwe should reduce its total of 135 000 or so civil servants.

But since 90 000 of that total teach, with health and agricultural workers making up almost half the remainder, there is not much room to manoeuvre there.

What is more likely is a commitment to the hard slog of reducing deficits, pushing the productive sectors, and returning to a policy of import substitution where possible.

As the strains on exchange rates and the fiscus are reduced, it will then become possible to introduce the new currency and finalise the process that should see inflation down to something a great deal more tolerable.

July 2006
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