Imported inflation to affect economic recovery

28 Jul, 2017 - 20:07 0 Views
Imported inflation to affect economic recovery

eBusiness Weekly

Albert  Norumedzo
The economic theory of inflation is one that a lot of Zimbabweans are all too familiar with. The hyper inflationary era of 2007 to 2008 ushered in a wave of economic terror across the population; the experience of which makes a story one must have lived through to believe it.

The memories of these times are unfortunately deeply engraved in the memories of every Zimbabwean to such an extent that any signs of reversion to the same can cause instant panic across the consumer base.

Economic theory defines Inflation as the rate at which the general level of prices for goods and services rises and, consequently, the rate at which purchasing power of currency falls. In efforts to keep the economy running smoothly, as part of a host of measures, monetary authorities like the Reserve Bank of Zimbabwe, through various monetary policy initiatives, attempt to limit inflation, and also avoid deflation, (which is the opposite of inflation and is often a signal of declining economic activity and consumer capacity).

Assuming in broad terms that higher levels of spending are crucial for economic growth, economic principle would dictate that, moderate inflation (below 3 percent, according to world estimates) is considered positive for economic growth as this is needed to drive consumption.

Monetary authorities typically target an annual rate of inflation believing that a slowly increasing price level avoids delayed/postponed consumption as consumers wait for lower prices expected in the future, this keeps businesses profitable and prevents deflation.

The other side of inflation, however, is the one that as Zimbabweans, we have all been well acquainted with, the thought of gravitating towards such an era sends chills across all economic stakeholders.

Notwithstanding the glaring sector capacity bottlenecks antagonising recovery across key sectors of the Zimbabwean economy, recovery is evident with a rebound of the agriculture sector from a drought induced -3,7 percent decline in 2016 to an impressive 21,6 percent in 2017 owing to a fairly good agriculture season.

Despite the waning commodity prices the overall economy is expected to grow by 3,8 percent from the previously projected 1,7 percent. In comes the unabated and growing foreign currency shortage, which has led to challenges in importation of goods and services from foreign markets, which unfortunately has not been matched by required recovery of production capacity in local industry to match this growing gap between supply and demand.

The widening shortages of products due to importation delays has as expected unfortunately outpaced the rate of local industry growth recovery to fill in the gaps. Coupled with lack of hard cash in the local economy, the resultant effect is a growing cash shortage induced imported inflation crisis, which threatens even the very fabric of recovery upon which the projected 3,8 percent growth is premised.

Consumers are feeling the heat, as all imported goods are reaching the consumer at prices almost double the price which prevailed before the cash crisis. As economic nature would have it, there are now 3 pricing systems prevailing in the market, a US dollar cash rate, a bond notes rate and a transfer rate and the pricing escalates respectively with margins no less than 15 percent.

If you take the price of an entry level HP 250 laptop, which was around US$320 about the same time last year, is now retailing for around US$505, that represents a staggering 58 percent increase in price, aggregate this example on all imported products and the economic impact on the consumer is nothing short of prejudice.

Being in the same economic atmosphere locally produced goods and services have also followed this inflationary pressure with unjustifiable price increases across the value chain.

Even at the household level, if one is purchasing something using mobile money transfer platforms, they are charged an extra 15 percent to 25 percent, and if this is extrapolated across the whole consumer base it means every dollar buy at least 20c less than what it used to buy before the cash crisis. Basic economic theory has proved that consumption is the largest contributing element in the GDP equation and if our consumption capacity has been reduced by margins of around 20 percent where then do we expect economic growth to come from.

In most cases, it is the mentality of profiteering and poor business ethics that has led to this predatory economic behaviour, which has a graze negative compounded effect, which ultimately leads everyone being in a worse off situation in the long run.

With such economic tendencies, consumption will go down and it will only be a matter of time before industry feels the declining consumer capacity and in turn follow suit by downsizing, further decreasing consumer capacity and before you know it, unemployment starts to shoot up again and all the economic milestones in their decent stature will erased.

The IMF has projected that inflation will grow from the current year-on- year figure of 0,75 percent to close the years at 5 percent; that is a 561 percent increase. The build-up of this inflation is not demand induced inflation, but more of a crisis induced inflation, which is not supportive or reflective of economic growth.

Authorities must expedite the revival of local industry to offset the supply gap and put in place measures to curb unjustified price increases that are prejudicial to the much needed economic recovery. With increased local output, those producers who are adding mark ups to compensate for the various costs associated with importing in this cash crisis stricken environment will see demand shifting to appropriately priced alternatives.

Progress is a result of common consensus and understanding of the shared purpose and objective, when different forces are pulling in different directions to quench short term selfish interest, the long term result will be the opposite of progress. Profiteering is an economic cancer, which if not addressed will be two steps back for every step taken towards economic recovery.

All consumers, producers, Government and other stakeholders must come together to craft long term solutions to the prevailing cash challenges not devise ways of making short lived gains at the expense of long term economic recovery.

  • Albert Norumedzo is an Equity and Alternative Investment Analyst who writes in his own capacity

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