Govt not in control of inflation
http://www.theindependent.co.zw/
Thursday, 17 November 2011 16:59
By Innocent Makwiramiti
THE major factors influencing growth of inflation are both external and
internal. Latest figures from Zimstats show that inflation, as measured
by the consumer price index, stood at 4,3% year on year for the month of
September 2011. Growth was driven by foodstuffs, which account for nearly
30% of the consumer price index, followed by non-alcoholic beverages and
utilities (ie rates, water, electricity). According to government targets,
inflation is expected to average between 4% – 5% in 2011, well below the
projected growth rate of 9,3%. Under such a scenario, economic growth will
be positive in real terms. Inflation, however, is expected to be above 5%
year-on-year by year end. This will be driven by external factors (ie
imported inflation, rand depreciation, rising food prices, Eurozone crisis)
and internal factors (ie wage, salary pressures, ineffective monetary and
fiscal policy, structural rigidities in the economy, low capacity
utilisation, prices of utilities and worsening balance of payments).
The big question is, does government have the necessary tools to control the
expected inflationary pressures? When use of the multiple currencies
replaced the local currency, inflation declined to the negative region. This
was a deflationary environment characterised by low production in the
economy, rise in cheap imports of basic commodities, worsening balance of
payments, massive unemployment levels and growth of the informal economy.
The decline in inflation does not imply that government had the necessary
tools to control inflation (ie appropriate monetary and fiscal policy to
fine tune the economy).
A significant portion of inflation is imported. As a result of low capacity
utilisation prevailing in the economy, at least 70% of basic commodities in
the retail sector are imported. Prices are therefore determined by forces in
the country of origin, of which government does not have control. This
exposes the economy to vagaries of regional and international economies
where the local economy does not have any influence. The rand for example is
depreciating and currently stands at around R8 to the US$ from a rate of R6
three months ago. This is likely to lead to an increase in price levels in
South Africa, which in turn will automatically be transmitted to Zimbabwe
since she is our major trading partner in the region. Government does not
have control in such form of price transmission.
The worsening balance of payments position on the current account signifies
the extent of imported inflation. Latest figures indicate that the current
account deficit stands at US$3 billion with imports at US$6 billion while
exports are at US$3,1 billion. Foodstuffs account more than 60% of imports.
Capital goods needed to improve capacity utilisation and hence supply of
goods and services remain depressed.
Capacity utilisation is currently at 57,1% on average although it varies
from a low of 30% to a high of 74% according to a recent study by the
Confederation of Zimbabwe Industries (CZI). The low level of capacity
utilisation is due to a host of factors, which include the liquidity crunch,
imports, low investment levels, high cost of production and depressed
demand. Capacity utilisation varies from industry to industry. The deficit
from low capacity utilisation has to be met by imports. What this indicates
is that we are an import-dependent economy, including imported inflation. In
such an environment it will be difficult to control inflation.
The above is worsened by the fact that world food prices are on the rise.
This is due to climatic changes and to demand outstripping supply. This has
an effect on imported basic commodities and our government does not have
influence on those prices.
The current Eurozone crisis will have an effect on the local economy and
will present challenges to our government insofar as inflation control is
concerned. The crisis will reduce demand by Europe for our exports in the
short to medium term. Further, bilateral and foreign direct investment will
remain depressed.
This is shown by the fact that foreign investors, who used to dominate the
Zimbabwe Stock Exchange (ZSE), have retreated. As such, liquidity in the
economy will remain low and hence so will capacity utilisation. This has an
effect on government in as far as controlling inflation is concerned. We
will continue to import inflation in the short term. We desperately need an
injection of fresh capital to jump-start the economy. As such, the expected
inflow of US$2 billion dollars from Marange diamonds, if managed properly,
will play a big part in reducing inflation through increasing capacity
utilisation.
Monetary and fiscal policies are necessary tools in a fully-functional
economy to fine tune economic variables and hence inflation. Monetary
policy is as good as dead, while fiscal policy is limping from the intensive
care unit. The two instruments are necessary to fine tune liquidity and
aggregate demand and hence inflation. This leaves the economy vulnerable to
external inflationary influences which our government is unable to control.
Part of the explanation can be due to absence of local currency. However, if
we had adequate liquidity in multiple currencies, the tools could still be
effective. There is no effective interest rate and exchange rate management
policy to influence inflation. Currently, the policy is determined by
external forces.
Other areas where government finds it difficult to control inflation are in
the areas of speculative, cost-push and demand pull-inflation. As long as
capacity utilisation remains low, speculative tendencies will remain in our
economy as import agents put a premium on imports.
Speculative inflation has become cancerous in our economy. Around 70% of
inputs in the manufacturing sector are imported. We do not have control on
the price of imported inputs. Input costs will continue to escalate,thereby
putting pressure on price hikes. Because local authorities are being
pressured by government to break even in their operations, they are
resorting to price hikes (ie water, electricity). This ends up being
inflationary. Wage spiral inflation is arising from demand for higher wages
by the private sector given the recent increase in the salaries of civil
servants. This area is difficult to control, especially given the fact that
the country is heading towards elections.
Demand for higher wages leads to demand-pull inflation. This may be worsened
if politicians start pouring money in the market for electioneering
purposes.
From the above, it can be seen that inflationary pressures are in our
economy and these will take time to be removed. What then are the best
possible solutions?Inflation is a necessary evil in the growth process. This
is provided all the economic fundamentals (ie liquidity, inputs, utilities,
infrastructure) are in place. What will be left will be to fine-tune
inflation / demand so that it moves in tandem with production. This involves
application of appropriate monetary and fiscal policy, which is not the
case in Zimbabwe at the present moment. But still we need to move towards
putting in place the necessary framework that will control inflation as we
jump-start growth in our economy.
Most of the strategies have been highlighted in many economic forums or
discussions. It is still however pertinent to mention them in this
discussion.
The strategy to be adopted to control inflation should be aimed at improving
liquidity within the economic system. This in turn will enhance the supply
of goods and services and consequently reduce inflation. A holistic approach
as outlined in the Medium Term Plan (MTP) has to be adopted, one that
enhances sectoral integration as was before the turn of the century.
Capacity utilisation in the real sector (ie agriculture, mining,
manufacturing, tourism) has to be increased.Under normal circumstances, 70%
of output from the agricultural sector finds its way into the manufacturing
sector. Because of challenges in the agricultural sector arising from
shortage of inputs, tillage problems, lack of production skills, poor
weather conditions, poor distribution and marketing and liquidity crunch,
the sector is currently unable to carry its role as a significant driver of
the economy. These challenges have to be urgently sorted out so that the
supply and demand gap of agricultural and manufactured agricultural
commodities is reduced. This will reduce imported inflation.
Exports have to be increased through putting in place export incentives.
This is particularly so in relation to the mining, tourism and manufacturing
sectors. Value addition in the mining sector must be carried out to improve
on earnings. A rise in exports will increase cash in circulation and reduce
the current account deficit of the balance of payments and consequently
imported inflation.
The financial sector is the engine of growth in any economy. In Zimbabwe,
this sector is not fully playing this role largely due to inadequate
financial instruments to mop up financial savings needed to increase
investments in the economy.
Financial instruments must be put in place to harness excess savings in the
informal economy. This sector has lost confidence with the formal banking
sector and is currently holding in excess of US$3 billion to US$4 billion
which can be channelled into the formal banking sector. This can play a big
part in the provision of medium/long term funding urgently needed by the
production sectors in order to improve supply of goods and services and
consequently reduce inflation (ie financial,technological).
Special windows should be opened for the small and medium enterprises in
order to enhance their operations. Experience in Asian tiger and western
industrialised countries has shown that the SME sector plays a big part in
creation of employment and supply of goods and services. Zimbabwe cannot be
an exception. Attention should be given to this sector to reduce
unemployment, increase consumption and create sectoral linkages and
consequently industrialisation. In the medium to long term, the SME sector
will play a significant part in the reduction of inflation.
For the above to succeed, a conducive environment must be put into place by
government.This relates to property rights, transparency, policy consistency
and commitment. It is the politician who is derailing most strategies for
economic growth largely because of self-centredness and greed. Because of
the myopic nature of the politician, most strategies are not fully
implemented, hence the continued economic challenges that we are
experiencing.
Business and labour are raring to go in a conducive environment. Foreign
direct investment (FDI) whether coming from the east, west, north and south
cannot come if there are no property rights and transparency. The onus is
therefore on the politician as the driver to create an environment that
increases the supply of goods and services and consequently control and
reduce inflation. The road can be long but it can be short if there is
commitment on policy consistency.