eBusiness Weekly
The month-on-month inflation figures for July were both a horror story and a bright beam of hope.
The horror story was the actual figure. The Consumer Price Index rose 21 percent between mid-June and mid-July, and that sort of rise, in isolation, is a near disaster.
But it was not in isolation. It came after a period of acceleration of monthly inflation, largely cost-push, after the RTGS dollar was delinked from the US dollar. In fact it was just over half the previous monthly inflation rate of 39,3 percent and the first drop in monthly inflation since the delinking of the RTGS dollar. That is a serious positive move, as the exponential graph that was developing suddenly reverses.
So while, when we look at the actual CPI we note that it is increasing but the rate of increase is falling. Or if you really want to be technical we have a positive first derivative but a negative second derivative, and that is the first negative since the delinking.
While we have to wait for a few weeks before we find out the official figures for the month-on-month inflation rate between mid-July and mid-August, anecdotal evidence suggests that while the monthly inflation rate will still be positive, the deceleration will continue as more prices stabilise, come close to stabilisation or even fall in cases where they were overset by those whose expectations of exchange rate changes did not come to pass. The wait is required by the processes at ZimStat, although they must have already collected the August data on the 495 items they price each month.
The period from mid-June to mid-July included battery of events and economic reforms which both pushed up the cost of living but which also sharply reduced the rate of the increase.
In mid-June the black-market exchange rate was swinging out of control and an ever larger proportion of exchange rate transactions were taking place out of official markets and were based on this exchange rate. In addition, more and more suppliers of goods and services were second guessing this exchange rate over future weeks and were pricing not on what it actually was but on what they thought it would reach within a few weeks. The culture of ignoring the economic fundamentals of stable money supply and primary budget surpluses was rampant as panic set in or manipulation became a driving force.
So we have the last, and worst, week of that cost-push inflation based on the black market. Then we had the announcement of the end of the multi-currency system, the bursting of the black-market bubble, but in early July the snappy rise in the interbank rate as this adjusted to the new single-currency system. The net result was that goods were still entering the market based on what suppliers had been charged at the higher black-market rate and a reluctance to adjust until the interbank rate definitely went stable.
In the month we are looking at there was only a short period of the new trend that has arisen of a relatively stable interbank rate and that market starting to dominate in currency trading.
The same batch of reforms in late June also ended the Reserve Bank of Zimbabwe’s well-meant distortions involving special allocations, in effect a set of hidden subsidies. From that point any subsidy had to be up front, in the budget and accounted for as a subsidy. This involved a modest batch of price rises in some critical areas.
Those processes largely explain why we still had a high month-on-month inflation rate. The deceleration in the rate of rising also arose from the reforms. The interbank market started working a great deal better; the growing expectation, desire or fear that redollarisation was imminent was scotched; and falling consumer demand for just about everything not absolutely essential for life forced suppliers to start looking at fundamentals and actual costs, rather than trying to second guess markets.
As we all start settling down to seeing the interbank rate being the real rate, and with that rate showing far more stability, despite continuously creeping up, we can expect pricing formulas to continue growing in rationality.
And a rising interbank rate is not an obvious given factor. The almost fixed money supply while prices rise has already started switching the economy from over-liquidity to far tighter liquidity, something that business sectors are starting to worry about. But tight liquidity means there is less pressure on the exchange rate and more likelihood that those applying pressure might be creating a second bubble.
The very large stocks of US dollars in the combined nostro accounts of net exporters, plus the holdings of US dollar cash in the banks, have to at some stage come to market, and if RTGS dollars are not increasing in number then that market will react in a fairly obvious way.
The month-on-month inflation across the sectors was not even, or even close to even. While the big items, like food, where there was a high percentage of local content or processing rose below the 21 percent, although in aggregate not much below, there were far higher jumps in sectors where products were largely imported or where service providers reckoned they were entitled to black-market US dollar parity, and even parity at the rate before the bubble burst.
One area that is still of concern is the jump in the health sector, a mind-boggling 43,3 percent, twice the average jump. This combines a number of factors.
First drug pricing was rocketing at a vague expected future black-market rate. It might have stabilised a bit towards the very end of the ZimState price period but the jumps were already in place. Secondly, even when costs are in local currency, there was a tendency for some in the sector to form what amounted to cartels, just possible when you are selling life or death.
But the authorities can push back hard using market forces. For a start, there is need for implementing national policy on monopolies, near monopolies and cartels. And that basically describes the wholesale pharmaceutical sector in Zimbabwe. More action on allowing competition will help.
The second factor that needs to be considered by the private health sector is that most users rely on medical insurance, and while monthly rates are rising they have been rising in line with general inflation, not health inflation. The dilemma facing many in business, of going for modest profits on volume or high profit on a few purchases, should result in a growing percentage of service providers looking at volumes, simply because there are not enough really rich patients. And, in the background the Government is delivering on promises made to its own professional staff, after quite justified complaints, to fix the supply of equipment and medication.
In less dramatic fashion the debate on volume versus “US dollar parity” is heating up in many business boardrooms and is forcing far more careful attention on actual costs rather than on assumptions that have little foundation on the real state of the economy.
As more businesses figure out pricing formulas that keep them viable through adequate profit margins, those that want a simple system of keeping accounts in US dollars and then using the black-market rate to convert are going to suffer.
It was the start of this conversion in culture during early July that caused the fall in the month-on-month inflation rate, but the sector-by-sector analysis of ZimStat shows that it is not yet universal. In most countries people and businesses do think in their own currency, and look at their costs and revenues in that currency. Zimbabwe’s 21st century experience of hyperinflation, dollarisation, and then hidden inflation as everyone believed in a fiction explains the anomaly. But we need to start thinking normally.
