The horrific month-on-month inflation of 39,3 percent for June was expected since we all knew what had happened to prices of so many products and services in late May and early June, and why they were shooting up, and why this led to the swift ending of the multi-currency regime.
We have also seen sudden stability in prices, with some items even falling in price, since the end of multi-currency with the result that the July month-on-month inflation will be low although a negative monthly rate, while possible, is still a longish odds bet. But a negative August monthly rate is a better bet since prices are still easing slowly for some goods and the price rises appear to have halted.
For some months, since October last year, there had been a growing trend for more and more to switch their costing models to pure US dollars and then convert to the prevailing vendor rate, more glamorously called the parallel market exchange rate. So the present inflation surge started. As months passed a growing group took this one step further and started using what they expected the vendor rate to be in a month or two, and there was considerable guessing dressed up as “professional estimating” at what this would be. Much of this guessing was as professional as a Roman pagan priest reading the entrails of a slaughtered bull.
We cannot blame many manufacturers and importers for switching costing models. The interbank market was not working very well, largely because of the gap between the rates on that market and the vendor market, and partly because a surprising number of people wanted it to fail, or at least be irrelevant, so that private deal making and deal-making commissions could continue to be the norm.
So many businesses were facing ruin unless they did follow the herd into the dodgy cauldron of the street currency market. After all this was probably where they would have to source their foreign currency to buy raw materials and other supplies.
All this pressure started to create a trend and then an expectation that Zimbabwe would re-dollarise, unofficially if not officially, with most transactions done in US dollars. That in turn put even more pressure on the street rates as people climbed in to stock up, and while the market players climbed in to make what they saw as a sure fortune, buying at one rate this month and selling at a higher rate next month.
With the very limited number of free-fund US dollars floating around, basically diaspora remittances, that meant that there was more demand than supply, so the street rate kept climbing making people even more desperate to stock-up and so causing the rises in the cost of US dollars they desired or feared, depending on whether they were consumers, market players or producers; whether they were net exporters or net importers.
So prices rocketed even further or were quoted in both US dollars and RTGS dollars or just in US dollars. This was now causing severe viability strains across many sectors because incomes, for most people in any case, were not rocketing and were largely static in RTGS dollars. So consumption was changing drastically, with most Zimbabweans cutting back on consumption and, as could have been expected, cutting back really heavily on items that were not absolutely essential.
In supermarkets there was still a large range of goods on the shelves, but not in the trolleys. In other words, an increase in prices led to a decrease in volumes.
Even for some essentials, such as cooking oil, there has been a significant volume decrease as people change their diets or cooking habits, in the case of cooking oil for example there is reportedly less use of that product as a sauce with families using less to just cook rather than flavour food.
The growth of re-dollarisation suddenly stalled on June 22, after Zimstat had done its monthly research for the June cost of living, when Statutory Instrument 142 of 2019 ended the multi-currency system. This followed a regeneration of the interbank market, primed by the Reserve Bank of Zimbabwe.
And it worked. The street rate, the parallel rate, suddenly crashed, with US dollar banknotes losing almost half their value overnight. The interbank rate started moving up steadily as that market was taken more seriously but that rate suddenly started stabilising almost a fortnight ago.
The Minister of Finance and Economic Development, Professor Mthuli Ncube, has been careful to explain that the ending of the multi-currency regime was planned, and was not a panic move. Everyone accepts it was one of the many steps required in the progress to the announced reintroduction of a proper local currency, a programme now basically complete, and so it can be argued that it was planned although we suspect the timing was tied influenced by events.
There are still those who talk about a local currency needing vast supplies of banknotes pouring out of ATM machines.
This seems unlikely in a country where digital transactions on swipe machines or through mobile money transfers now totally dominates. We have even reached the stage where great grandmothers in rural Rushinga are being careful to buy goodies from the local shop in units of $9,90 with mobile money so they can, or so they tell their urban grandchildren who send them the money in the first place, avoid paying “Mthuli’s 2 percent”. Acceptance of digital money is so widespread that it would be daft to return to people wandering around with full wallets of cash. And the usefulness of a digital transaction economy to the dark-suited heavies at Zimra is obvious.
The only good reason, so far as we can see, for changing a limited supply of bond notes for a limited supply of local currency notes would be to have a rule that no one could change more than say $200, so wiping out the stockpiles of bond notes being kept by hoarders and warning everyone that future cash-only transactions carry very high risks.
The high inflation rates we saw in May and the first three weeks of June were all cost-push, driven by the exchange rate. Stabilising that was obviously essential and that set the timing of the steps outlined in SI142.
There is still more to do. For a start those reliant on cross-border traders for certain items are still eager to accept US dollars. Enforcing the ban on such transactions needs to be tightened, along with some loosening of the rules of the interbank market.
Some prices are still being set at what the parallel rate was in mid-June. In some cases the seller has a case, since they bought their US dollars to pay for the goods or the import at that rate. In these cases prices should drop as new stocks, bought at interbank rate, reach them.
But that is the position in the pharmaceutical trade for example, and the lack of pressure to bring prices of imported drugs, the overwhelming majority since the destruction of the local manufacturing industry a decade ago, is a direct result of the monopolies and cartels in the import and wholesale part of that business. And pharmaceuticals are not alone, so another box to tick on the Government’s must-do list is ending monopolies and cartels.
At some stage the bubble in the interbank market will have to burst. The parallel market, which now tracks the interbank rate instead of the other way round, reckons that there is a bubble there as well since the illegal dealers are being very careful not to over-quote prices.
At some stage the pressures on the interbank rate will have to ease as importers cut demand because of lower volumes or because they have paid off debts and built up stocks.
At the same time exporters will have to sell more to pay bills, which they now have to settle in RTGS dollars, not US dollars. As that happens the interbank market will start working properly.
So far as exchange rates and inflation rates are concerned, we are now like a population that has undergone heavy shelling. The June inflation figures being the serious final barrage.
The bombardment has stopped and we are all crawling out of our shelters, carefully admittedly, and assessing the damage and what to do next. As stability continues we should start seeing quite different results.