Inflation could hamper real GDP growth

17 Apr, 2019 - 14:04 0 Views
Inflation could hamper real GDP growth

eBusiness Weekly

Taking Stock Kudzanai Sharara
Nobody cared much about this week’s inflation figures for the month of March released by ZimStat as the outcome was largely expected. The real feel of inflation is experienced by all, even without the figures. But that’s no reason to ignore the official figures. Here they are:

The month-on-month inflation rate in March 2019 was 4,38 percent gaining 2,71 percentage points on the February 2019 rate of 1,67 percent.

The year-on-year inflation rate (annual percentage change) for the month of March 2019 as measured by the all items Consumer Price Index (CPI) as widely expected stood at 66,80 percent, up from that of February at 59,39 percent.

As you can see, the upward trend which started back in September 2018, is still with us, in fact it got a little steeper in March than it was in February. Worse should be expected in April as most businesses started effecting price increases after the data collection period between 13 to 19 March 2019.

April figures will almost certainly reflect higher production costs as most suppliers started aligning prices to the interbank rate.

Wage increases will also start feeding into production costs, and many businesses are being charged higher rentals. As the exchange rate moves away from 3, the need to make adjustments seems to have become more urgent for most businesses.

As we write, the price of bread has just been hiked to an average RTGS$3,50 from an average RTGS$2,00 prior. This is likely to be reflected in the April figures as it falls within the collection period.

From the second graph accompanying this article, we can clearly see that the biggest inflation drivers for March month-on-month are products or services whose prices had not increased significantly in the previous month of February. April could be worse as prices of other products and services including wages and salaries (a key component in production costs) have since been reviewed upwards.

Some of the major drivers for the March month-on-month inflation were; vegetables with an inflation rate of 13,50 percent and a weighting of 7,81.

Alcoholic beverages have also become expensive as brewers also aligned prices with both inflation and the weakening exchange rate. March month-on-month inflation rate for this category, which has a weighting of 3,45 was at 16,24 percent.

Prices of spirits, wines and beer in particular were the major drivers with month-on-month inflation coming out at 15,37 percent, 12,71 percent and 17,85 percent respectively. Tobacco also had a high monthly inflation at 9,65 percent.

Buying a copy of a newspaper has also become expensive with prices having gone up by 47,83 percent month-on-month.

Education especially for those doing correspondence learning also became pricey during the period with fees having gone up by 35,04 percent month-on-month.

A visit to the doctor through the use of medical aid while it brings you better health, it will be at the expense of your pocket as medical aid contributions went up by 32,25 percent. Even funeral cover for many companies is expected to surge 100 percent in June.

Overall food prices were the biggest movers with the month-on-month food and non-alcoholic beverages inflation rate at 5,10 percent in March 2019, gaining 1,54 percentage points on the February 2019 rate of 3,56 percent.

The month-on-month non-food inflation rate stood at 4,05 percent, gaining 3,35 percentage points on the February 2019 rate of 0,70 percent.

What options are there to curb inflation?

If left unaddressed, inflation will become entrenched and could hamper real GDP growth, which is expected to be around 3 percent in 2019. There is thus need for the authorities to focus on implementing structural reforms to remove supply bottlenecks, increase agricultural productivity, and improve the business environment.

Currency depreciation and uncertainty about the future direction of policies is what has caused inflation to continue on an upward trajectory.

The RTGS dollar has been losing value on both the formal and informal market, and business has been using this to price their products. Uncertainty over the future direction of policies has also been a key determinant as Government policy has been left to various interpretations resulting in damaging unintended consequences.

A clear communication of both fiscal and monetary policy position to market participants would help contribute to improved policy credibility and in anchoring inflation expectations.

The limited availability of foreign currency has also exacerbated the problem as prices are increased and pushing inflation up further.

Given Zimbabwe’s dependence on a narrow commodity export base dominated by gold and tobacco and the economy’s exposure to large shocks, there is need to emphasise the importance of restoring macroeconomic stability in the near term through the pursuit of tighter fiscal and monetary policies geared toward placing inflation on a declining trend.

Stubbornly high inflation rate could also force banks into demanding high interest rates which is the case now.  Banks are on record saying the current interest rates are very low and encourage spending and speculative attacks on the exchange rate. In proposals submitted to the RBZ, banks through the Bankers Association of Zimbabwe would want interest rates to be put up in line with inflation and the prevailing economic environment.

This they say, is another way of tightening money supply. Said BAZ: “Lifting of the interest rate caps” will help address speculative borrowing. When banks increase their rates, fewer people want to borrow money because it costs more to do so while that money accrues at a higher interest. So, spending drops, prices drop and inflation slows.

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