According to ZimSTAT; Zimbabwe’s year on year inflation rate has been on the decline for three consecutive months from 362.63% in January, 321.59% through February to 240.55% in March. We investigate this decline in an exclusive interview with Economists.
1. Lockdown
The current slow down of the year on year inflation might be thanks to the first COVID-19 lockdown of 2021 in Zimbabwe. Economist Bensen Banga says the restricted economic activities in Zimbabwe had an impact on the country’s inflation.
2. Government Interventions
The slowdown coincided with an almost two months inflation enforced by authorities from early January to 1 March.
Money Supply
A reduction in money supply and or financial instruments could be the cause of a reduction in aggregated demand and restrictions in terms of imports according to Banga.
The decline in money supply has been the Reserve Bank of Zimbabwe‘s way of curbing inflation in the country. This was after the central bank was blamed for fueling the 2007-8 inflation by printing out a lot of cash increasing the money supply. Economists say that increasing the money supply faster than growth in output will result in more cash chasing few numbers of goods thereby fixing the prices upwards.
3. Decrease in Demand for Goods and Services
The decline in aggregate demand, which is a decrease in the total demand for goods and services could have been caused by the restricted economic activities with authorities also constraining the movement of people.
Banga said, “A decline in demand consequently results in a fall in prices.”
The lockdown was characterised by slow movement across borders and resulted in restrictions in terms of imports and this had an impact on inflation.
4. Speculation vs Inflation
Another economist Charles Dube however, reflected Zimbabwe’s inflation to speculative tendencies and perception.
“Our business people did not completely divorce themselves from the speculative pre-2009 speculative pricing models,” he said.
Dube believes the rates of inflation are not as affected by economic fundamentals as they are derailed by mindsets, optimism or the pessimism of the general populace.
“To that extent, the reduction in inflation could reflect the business mood.”
The economist argues that Zimbabwe’s pricing models are biased towards our perceptions of the value of the US$ and the public tend again to speculate against changes in the value of the local currency.
He believes that increases or reductions in inflation are more social than they are economic or scientific.
“The 33 to 55% mark rules of thumb prevalent in most countries and even Zimbabwe before independence has been overtaken by the current ‘let me get all my money back per transaction’ gumaguma dog eat dog culture.”
Dube went on to say, “You will notice that even the exchange rate increased sharply at a time when there was a reduced business activity just after the introduction of lockdown and business closure due to Covid. Proper economics would have pointed to reduced derived demand for the US$ and yet it was not the case. We have a mindset of ndakuwanirapo (I got you) and the highest price for what I am selling.”
RBZ Economic Projections
RBZ has a target of reducing the year on year inflation rate to 10% by December 2021 from the 362.63% recorded in January.
Commenting on the Central Bank’s target of reducing the year on year inflation rate to 10% by December 2021 Banga spoke of the need to have higher interest rates on monetary policy, tight fiscal policies and supply-side policies.
The economist argued that higher interest rates increase the cost of borrowing and discourages spending leading to lower inflation but also resulting in lower economic growth.
On tight fiscal policies, Banga said that higher income tax and or lower government spending will reduce aggregate demand leading to lower growth and reduced demand-pull inflation.
Supply-side policies “aim to increase long-term competitiveness e.g. privatisation and deregulation may help reduce costs of doing business, leading to lower inflation.” according to the economist.
Dube on the other hand spoke of the need to have economic fundamentals for such a target to be achieved.
He said, “It all depends on the business response for there was no change in fundamentals to warrantee the initial skyrocketing levels in the first place.”
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