eBusiness Weekly
Martin Kadzere
The Reserve Bank of Zimbabwe (RBZ) is aiming at cooling high inflation by targeting a gradual decrease in money supply growth to a roughly 10 percent annual expansion in the short term, a senior official with the apex bank said on Wednesday.
Zimbabwe’s annual inflation accelerated to 66,8 percent in March 2019, gaining 7,4 percentage points on the February 2019 rate of 59,4 percent, driven by both food and non-food prices, the Zimbabwe National Statistical Agency reported a fortnight ago.
Monthly inflation, also gained 2,7 percentage points, from 1,67 percent in February 2019, to 4,4 percent in March 2019.
Dr Nebson Mupunga, central bank’s director for economic research said sustained decline in money supply growth would help in anchoring adverse inflation expectations currently driving up prices.
“What we have seen is that most of the inflation that we are now witnessing emanated from increases in money supply,” said Dr Mupunga at an award
presentation event to insurers organised by Zimpaper’s outfits, BoldAds and Business Weekly in Bulawayo on Wednesday.
“Using our internal model we have discovered that there is one-to-one relationship between increases in money supply and increases in inflation. So there is commitment on the part of the central bank to limit money supply within the growth and enhancing levels so we have adopted an inflation targeting framework where we are targeting money supply growth of around 10 percent (by year end) and we believe that with that target, we will be able to anchor inflation to lower digits preferably to around 10 percent consistent with the target growth in money supply.”
State of money supply situation
Broad money supply growth peaked to 47,5 percent in July 2018, before decelerating to 28,05 percent by December. It slightly increased to 38,17 percent (provisional) in February 2019, partly reflecting the exchange rate movement.
While the central bank will fight inflation by reducing money supply growth, Dr Mupunga said inflation will continue rising albeit at a much slower pace mainly reflecting increases in prices of a few commodities, which were yet to adjust to the new equilibrium and the base effect before it start decelerating from October this year.
He attributed the current upsurge in the inflation rate as witnessed in March to speculation “because in terms of the fundamentals those that have been driving inflation in the past (money supply) are now corrected”.
Dr Mupunga said another important variable, which needs to be put into context is the output gap. The output gap measures the degree of inflation pressure in the economy and is an important link between the real side of the economy – which produces goods and services – and inflation. All else equal if the output gap is negative over time so that actual output falls below potential output over time, prices will begin to fall to reflect weak demand.
Prices to start falling
on low demand
Dr Mupunga said Zimbabwe’s economy is still operating with a negative output gap, reflecting low aggregate demand, compared to the country’s current productive capacity.
This suggest that the current wave of price increases is unsustainable and beyond the reach of the majority. Negative output gap is a signal of potential decline in prices.
“What we are witnessing in the (output) gap is that there is low demand; production is there but in terms of demand salaries are low, earnings are low. People are now failing to demand even (for) the goods that are already available,” said Dr Mupunga.
“So it means that there is now resistance in terms of price increases. So there is no scope for further price increase. What we see going forward is stabilisation in prices.”
RTGS$ to stabilise
He said the introduction of the RTGS$ as the official accounting settlement currency in February this year for national budgetary purpose would stabilise in terms of its value, going forward especially as confidence improves.
“We believe (price increase) is a temporal phenomenon but going forward there will be correction of prices.”
Speaking at the same event, Kunaka Pfungwa, Fiscal Policy director in the Ministry of Finance and Economic Development reiterated Minister Mthuli Ncube’s position that the Government, through the Transitional Stabilisation Programme seeks to deal with fiscal indiscipline.
Addressing industry and commerce executives during the International Business Conference (IBC) and the Zimbabwe International Trade Fair on Wednesday, Minister Ncube said the Government finances were sound.
“We are doing very well on the fiscal front . . . Government is solvent, we are running surpluses and we have been doing average surpluses of $100 million since September last year when we came in.
‘‘In January we had surplus of $102 million, February $85,5 million as we had to take into account cushioning of civil servants. In March, our surplus doubled to be just about $200 million,” Prof Ncube said.
