eBusiness Weekly
The experience of repeated, accelerated crises can hamper peoples’ ability to accept certain developments as they are even in situations where circumstances might have changed.
They rely on their past experiences to make judgements.
The same can be said of Zimbabweans. Past economic crisis seems to have permanently entered people’s beliefs and understanding about the operations of an economy.
Zimbabwe went through decades of economic decline mostly as a result of mismanagement, corruption and poorly crafted or implemented economic policies.
The period prior to 2008 saw many people experience losses, sometimes substantial losses, in the value of their savings. Many are yet to recover.
The overall period leading to 2017, apart from the relative stability witnessed during the Government of National Unity, was also generally bad.
It was so bad an era that the current Government chose to detach itself from past administrations hence the use of names such as the Second Republic or New Dispensation.
While the current Government has done a lot toward achieving economic stability, losses of the past have a strong influence on expectations and behaviour.
While past losses can be measured by the actual amounts people lost or by the purchasing power eroded by hyperinflation, there is also a third potential cost, which is more long-term and difficult to measure.
The hyperinflation and currency crisis witnessed prior to 2008, led to the mistaken belief that use of the United States dollar, which to a large extend brought the stability witnessed during GNU, is all that is needed for economic stability, development and growth.
The above reveals a crisis of expectations within the economy. As highlighted earlier, past economic crisis seems to have permanently entered people’s beliefs about the operations of an economy.
One of the false beliefs, which is informed by the stability witnessed during GNU, is that prices should not go up in US dollars’ terms.
Indeed, between 2014 and 2017, the country’s annual inflation was either negative of below one percent. That period is probably the basis on which many believe prices must not increase in USD terms.
You often hear people questioning why prices are increasing in USD terms. Granted any price increase must be justified, but to then think they must not increase at all, is not how the economy works.
Economic variables are not static that they do not change. One such variable is the relationship between a currency, in this case the USD and other major currencies, in particular those from countries we import from such as South Africa and probably China.
For example, between 2012 to 2016 the rand was weakening against the US dollar. In December 2015 in particular, the rand crashed to R15,38, before getting within a fraction of R18 to the dollar in early January 2016.
What this meant is that for every dollar that a Zimbabwean importer had, they could get more Rand for it for as long as the rand continued to weaken. This meant prices of South African imported products would go down as the rand weakened.
This is the reason in Zimbabwe, during the GNU era, prices would fall and inflation was negative.
Fast forward to last year, the rand weakened to R19 to the USD. Prices of South African imported products were supposed to be cheaper, but probably because of distortions and currency changes in the local economy, the movements were not felt.
The use of US dollars was also not that prevalent for the better part of 2020 so price movements were not immediately felt or were in few pockets of the economy.
But come 2021, the use of the US dollar is now wide spread in the economy. More businesses are now charging for goods and services in US dollars. This is at a time the rand has been strengthening and has moved from R19 in 2020 to the current R14,27 as of yesterday.
What this means is that Zimbabwean importers now need more US dollars for their imports from South Africa.
A strengthening rand is a cost to Zimbabwe as South Africa is the country’s biggest trading partner. Of the US$4,9 billion imports in 2020, at least US$2,4 billion was from South Africa.
A strengthening rand will inevitably lead to price increases, even in US dollar terms. This is something that, because of experiences of the past, some Zimbabweans are failing to grasp.
While we are at that, rising inflation in South Africa could also filter into prices in Zimbabwe for imports sourced from SA.
The latest inflation figures from South Africa show that headline consumer-price index rose 3,2 percent from a year earlier, compared with 2,9 percent in February 2021.If this inflation filters into Zimbabwe, it could result in imported inflation and this can reflect in local prices either in the local currency or foreign currency.
It’s the same with fuel. If international prices of the commodity go up, it’s inevitable that local fuel prices will follow suit, unless Government decides to subsidise the fuel, or cut back on its many taxes and levies.
Food prices have also been on the rise in South Africa and other international jurisdictions.
Prices for global food commodities rose for the 10th month in a row in March according to a new report from the Food and Agriculture Organisation of the United Nations.
FAO’s Food Price Index, which tracks monthly changes in the international prices of commonly-traded food commodities, was 2,1 percent higher in March than in February and is at the highest level since June 2014.
What this means is that whether one is pricing in US dollar or the local Zimbabwe dollar, if the products are imported or have an import component, its inevitable price will go up unless the business can absorb the international price increases.
