For the fourth year running, Zimbabwe recorded average annual inflation in triple digits with 2022 monthly average at 184%. Despite the significant fall from the eyewatering 838% (Recorded in July 2020) to 244% for the month of December 2022, the Consumer Price Index (CPI) continues to increase marginally every month showing that economic fundamentals are not stable and are not being addressed.

The Zimbabwean dollar was relaunched officially in February 2019 at a rate of US$1: ZW$2.5 but has consistently depreciated with current market rate at US$1: ZW$1100. The depreciating local currency has made life unbearable for labour and households as income adjustments from salaries and other sources such as informal trade cannot match the price increases of basic goods and services.

Similarly, businesses continue to lose value and consistently make losses induced by exchange rate differentials. The unstable environment makes credit in local currency a predictable loss. High levels of inflation also create an incentive to spend money while discouraging savings in the economy. This fully explains the extremely high velocity of the Zimbabwean dollar which works as a transitory currency which is quickly disposed off in favour of foreign currency (artificial demand for foreign currency). Inflation League

With annual inflation of 244% in December 2022, Zimbabwe maintained its top stop on the globe beating war torn countries such as Ukraine, Syria, Yemen, Libya, Sudan, Somalia, Central African Republic (CAR), Democratic Republic of Congo (DRC) and Afghanistan.

Coming a distant second on the globe is Venezuela which had inflation rate of 156% in October 2022. In the SADC region, Harare has largely been a pace setter on high inflation since 2018. In 2022, South Africa had average monthly inflation of 7% while neighbors also had relatively manageable levels of inflation rate with Zambia averaging 11%, Botswana (12%), Mozambique (10%) and Namibia (6%).

Difficult past

Harare has already had to grapple with record-breaking hyperinflation between 2007 to 2009 when month on month inflation reached 79.6 billion percent per month in November 2008, with annual inflation reaching an astounding 89.7 sextillion in December 2008. The inflation run only stopped after the country adopted the US Dollar in April 2009 to save the economy from total collapse.

However, in November 2015 a local currency (bond botes) was introduced in the market. The bond notes seemed to maintain value on paper for 3 years despite massive foreign currency withdrawals and externalization that was happening in the economy. After the formal re-introduction of the Zimbabwean dollar as the RTGS currency in February 2019, inflation increased from 57% in January 2019 to a record 838% in July 2020. The increase can only be attributed to a cocktail of reasons where the central bank is at the core of that instability.

Inflation has been persistently high in Zimbabwe despite the country’s Gross Domestic Product (GDP) being among the top 20 in Africa. Smaller economies in Africa such as Eritrea, Gambia, Cape Verde, Seychelles, Guinea-Bissau, and Comoros have consistently performed better than Zimbabwe.

This begs the question on how central banks from very smaller economies can manage to keep inflation very low when Zimbabwe is consistently failing? Similarly, what are those countries doing right that Zimbabwe is failing to copy and paste? More importantly, why does Zimbabwe persistently rank so high on inflation in the world?

Money printing

The major cause of inflation in Zimbabwe is pure money printing to finance quasi fiscal activities, bail out state entities and fund government programs. This entails that monthly or annual money supply growth far outweighs production of goods and services in the economy.

In the past 3 years, the central bank has been involved in quantitive easing to credit exporters who are compelled to surrender 40% of their export earnings to the central bank at a pegged exchange rate.

The dilemma for the central bank is that it needs cheap foreign currency to pay its debt and finance government foreign currency needs (especially offshore expenditure), while at the same time it must credit various exporters with the surrendered portion of non-existent local currency. In 2022 alone, broad money supply grew from ZW$470 billion in January to over ZW$2 trillion as of December. The growth in money supply also shows the loss of value for the Zimbabwean Dollar against the greenback.

Growth in broad money supply creates artificial demand for foreign currency thereby weakening the Zimbabwean Dollar and increasing consumer prices.  

Quasi fiscal activities

Quasi-fiscal activities are financing activities undertaken by state-owned banks and state enterprises at the direction of the government. Examples include subsidized bank loans, subsidized imports of fuel, electricity, or any funding for the provision of goods or services provided for at noncommercial rates or below the market prices. Often, quasi fiscal activities are not provided for in the national budget.

Between 2005 and 2008, Zimbabwe’s central bank carried out a plethora of quasi fiscal operations that were key drivers of hyperinflation in the economy.

These included the 2005 Agricultural Sector Enhancement Productivity Facility (ASPEF), Operation Maguta, Parastatals and Local Authorities Reorientation Programme (PLARP) and the Basic Commodities Supply Side Intervention (BACCOSSI).

Since the RBZ Debt Assumption of 2015, the bank implemented several quasi-fiscal activities such as supporting small scale gold and tobacco production, funding consumption subsidies (for commodities such as fuel, cooking oil, wheat, soya, and others), boosting tourism, funding agricultural inputs, cross border trade and export incentive schemes among others while crowding out the country’s financial institutions such as banks. Currently the central bank is engaged in buying Gold from miners at spot prices and minting it to sell gold coins below market prices. The impact of these quasi-fiscal activities is that they directly contribute to money supply growth, increase pressure on foreign currency and create rent seeking behaviour that nurtures corruption in and outside government.

Deficit Financing

Since 1980, the Zimbabwean government has consistently run its economy with a budget deficit (Save for the period of cash budgeting from 2009 to 2011). Thus, the treasury deliberately sets its expenditure above collectable tax revenues in order to induce expenditure driven economic growth. The strategy has seen billions of dollars being committed to agriculture (Operation Maguta, Command Agriculture, Presidential Input Scheme and Pfumvudza among others) and of late, infrastructure projects such as roads and dams. Since Zimbabwe is largely isolated by multilateral and bilateral institutions, the only option is to borrow from the local market via Treasury Bills (TBs). However, domestic borrowing causes a credit squeeze which crowds out private investment. As such, the government simply needs to spend below taxable revenues.

Confidence Deficit

There is very limited public confidence in the local currency, in the central bank (monetary policy) and in various government policies due to repeated policy failures. The apex bank has operated as a financing arm of the government over and above the constitutionally set overdraft limit of up to 20% of the previous year’s fiscal revenues (Reserve Bank Act, Chapter 22.15). To address the confidence deficit, the central bank needs to manage inflation, so that it declines to less than 15% in line with other African countries. The reforms undertaken to achieve that decline and the consistency required will indirectly bring confidence.

 

Foreign Exchange regime

In 2022, Zimbabwe’s foreign currency receipts increased to over US$12 billion (up from US$6.3 billion in 2020 and US$9.7 billion in 2021). This means that Zimbabwe is one of the highest recipients of foreign currency in Africa (Per Capita) and the country does not have a foreign currency shortage. The Achilles heel is on foreign exchange regulations, trading or allocation mechanism where the central bank maintains absolute control.

Low productivity

Deindustrialization, high cost of production locally and low agricultural productivity in Zimbabwe has led to overreliance on imports to meet local demand. The country spends billions annually to import agriculture commodities that could be grown locally and curb the increase in food inflation while billions are also spent on merchandise or raw materials that used to be produced locally. Agriculture provides 55% of raw materials used in the manufacturing sector while 80% of inputs used by local manufacturers are imported. This means that the import bill carries with it imported inflation and exposes the country to global supply shocks. To address this, government policies must be aligned to achieve reindustrialization and import substitution.

To tame rampant inflation, there is a strong case for the independence of Zimbabwe’s central bank considering the harm caused by excessive money printing and conflation between monetary policy and government policy for politically sensitive government programs. The central bank should concentrate on its core mandate of maintaining currency value, managing inflation, and regulating the financial services sector to create a conducive environment where private sector capital can be crowded in. The rate of inflation dictates the pace of economic growth and living standards in any nation, as such the central bank cannot be left in its comfort zone when inflation persistently wreaks havoc in triple digits for over 4 years in a row.

  •  Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). — vbhoroma@gmail.com or Twitter @VictorBhoroma1