eBusiness Weekly
Clive Mphambela
“We all know that inflation is an evil thing, but when it runs its course unplanned it brings certain natural correctives. Today, these correctives have not been allowed to come into play, and the result is most unhealthy.
“The making of large paper profits, which is a natural concomitant of inflation, enabled industry to maintain its real capital intact; the restriction of money profit at a time of rising prices is denuding industry, not of real profits, but of real capital.”
The above quote, whilst credited to one Paul Chambers, who at the time was a former senior official of the British Inland Revenue Service and at the time, a leading member of the Conservative Party, which was at the time, in opposition in the British Parliament.
When he uttered the above words of wisdom, the context at the time, was that the British government, which then was led by the Labour Party, had placed a heavy reliance on price controls, which were being instituted to tame the rising tide of inflation and against a background policy of very low interest rates, which were being directed downwards in an effort to stimulate the expansion of credit to industry.
This scenario, which has been all too familiar in the Zimbabwean economy for many decades, has always proven as it has recently, to have dire consequences for both the industrial enterprises that low interest rates are meant to stimulate the general health of the economy.
In recent years, we have seen very nuanced but concerted efforts by the Government to control prices of many essential goods together with the price of money, ie the exchange rate as well as the cost of credit (interest rates). We have also see efforts to influence prices of various services in the economy. It is, however, common cause that none of these efforts have been effective as allocative tools in the normal process of resource allocation. Eventually, all these strategies have only served to build up pressures and distortions in the economy that eventually were unleashed as a resurgence of inflation in October 2018.
This is exactly what has happened to the Zimbabwean economy. It was not the separation of Nostro FCAs from RTGS money accounts by Hon Professor Mthuli Ncube that triggered the spike in the parallel exchange rates in October 2018.
It was not the announcement of the 2 percent Intermediated Money Transfer Taxes either that caused prices to rise. It was in effect the culmination of the various price caps and distortions in the economy, especially on money (credit and exchange rates) and the expansion in money supply that had been slowly over many months prior to the new measures being announced, slowly bringing the economy to a boiling point.
These pent up inflation pressures, like the forces that build up before a volcano erupts, began to push through and immediate policy action was required to bring the train back on the rails.
Zimstat on Monday released CPI statistics for the month of May 2019, and my guess earlier this year that inflation would speed up to near 100 percent before receding has largely proven to have been correct.
However, it is also increasingly looking to me like the inflation spring is uncoiling and inflation is actually gathering pace. The saving grace is that the measure of CPI is only historical. It only tells us what HAS HAPPENNED. Our focus as economists and financial planners, should be on starting and engaging in a serious conversation which asks: Where is inflation really going? Ultimately that is the more important question. Of course, make no mistake, a clear understanding of where we are and how we got here is also very important.
However, we need to stop for a moment, take stock and try and see ways of figuring out how inflation will play out for the remainder of the year.
My take is that whilst a number of measures have been instituted by the monetary and fiscal authorities, a few critical elements still remain to be addressed so that macroeconomic balance is restored. As long as other key variables are out of kilter, we will remain whistling in the wind. One of the key issues is that all these reforms that have been done to date are happening in an environment of sharply negative (real) interest rates.
Monetary aggregate figures also show that the structure of deposits in the economy is skewed towards corporate savings or transactional balances in the main and this is also a major cause for concern as corporate cash balances and free cash flows are driving the exchange rate, which in turn inflicts pass-through pressures on inflation.
The corporate savings glut implies that businesses are not investing in new plant and equipment. The corporate sector is not expanding. On the other hand, the disproportionate holdings of deposits in the economy by individuals points to further strain and structural weaknesses in the economy.
In a normally functioning economy, the household sector must be net savers and the corporate sector must be net borrowers of those savings, and this drives growth. The current environment was a harbinger for inflation and speculation and hedging.
The main concern therefore for many economists, should be that, whilst cheap money may in the short term, ameliorate the cost of debt service for firms and households, the current environment, where interest rates are capped and have become seriously negative and where there is a very high marginal income tax rate, two things usually happen. There is no incentive to save money at all by both corporates and households and that spells doom.
Like Chambers, I am therefore inclined to argue that often-times interventions by the Government in the financial markets can be occasionally more harmful than they are useful.
Understandably, it is the Government’s place to worry about the welfare of the people and from that angle, the authorities have always had a legitimate interest in seeing that basic goods and services not only remain available in the market, but also remain affordable. It is however time to reflect and perhaps adopt a more aggressive policy stance that will reign in inflation.
It is refreshing that the authorities are committed to taming money supply expansion, reducing the potential for monetisation of budget deficits and so on. These are very crucial steps, which should see inflation pressure recede in the next few months.
We are all aware that the pent up inflation pressures in the economy were a direct result of the rapid expansion of the money supply which all of us agree can be traced back to the beginning of 2014. Since that time money supply growth measured on a monthly basis or annual basis has consistently outpaced growth in GDP.
In simple terms if we assume that GDP growth is a proxy for productivity growth in each year, when one compares annual money supply growth to GDP growth there must be a relationship.
However, when money supply begins to expand much faster than GDP growth we are bound to have inflation in the economy. There was now too much money chasing too few goods.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer is associated with.
