Persistence Gwanyanya
WHILE economists may agree on the likelihood of the continued strengthening of the Zimbabwe dollar, they are divided on the possibility of a general reduction in prices on account of recent stabilisation measures by Treasury and the Reserve Bank of Zimbabwe (RBZ).
Those who believe that prices will remain sticky base their argument not only on traditional economic theory that presupposes that prices are not flexible downwards, but also on doubts that the Government will be able to continue holding the value of the Zimdollar steady.
Conversely, others argue that due to the strong pass-through effect of the exchange rate on prices, the drop in prices is possible.
Unlike in a mono-currency regime, it is possible for business to reduce prices in a multiple currency system, where prices are largely indexed to the exchange rate.
In fact, for businesses that are displaying prices in foreign currency, they may not need to change prices but the exchange rate they are using on Zimdollar pricing.
The same applies to wages and salaries that are pegged in forex but payable in Zimdollars at the interbank rate.
Analysts who opine that the price madness witnessed in the last two months was irrational and unwarranted are convinced that price reductions are inevitable as a correction of past excesses.
The spike in inflation was partly as a result of fear of the Zimdollar imploding following proclamation of the election date on May 31, 2023, which resulted in massive sell-off of the local currency.
This accelerated dollarisation resulted in a vicious cycle, which eventually reached a tipping point in a typical hysteresis scenario.
Importantly, an understanding of other channels of inflation — which had little to do with economic fundamentals, but the need to comply with pricing regulations, and, of course, to attract foreign currency — gives credence to the belief that prices will eventually begin declining.
As parallel market rate premiums increased, peaking at more than 100 percent in the last two months, some businesses hiked their United States dollar prices to the Zimbabwe dollar equivalent on the informal market to comply with Statutory Instrument (SI) 118 of 2022.
In essence, the SI regulates Zimdollar pricing to a maximum limit of 10 percent of the interbank rate.
There are others who chose to ignore the law and indexed their local currency prices to the obtaining or expected parallel market rates.
The former scenario resulted in escalation of both Zimdollar and US dollar prices, whilst the latter resulted in massive increase in Zimdollar prices.
The concomitant effect of these market dynamics was a spike in annual and month-on-month inflation to 175,8 and 74,5 percent, respectively, in June 2023, from the previous month’s inflation of 86,5 and 15,7 percent, in that order.
With the reduction of parallel market premiums to within 10 percent-20 percent, price reductions — in both Zimdollar and US dollar — are inevitable, more so, in circumstances where demand driven by the need to offload the Zimdollar has subsided.
The reduction in the May month-on-month and year-on-year inflation to -15,25 percent and 101,3 percent, respectively, is instructive.
Businesses must now strive for competitiveness as stabilisation measures become entrenched.
Again, this may entail price reductions.
While we have begun to see the downward correction in prices, the pace has been slow, as business fear huge losses, especially after taking positions when the Zimdollar value precipitously declined.
Remember, the interbank rate peaked to close to US$1:$7 000, whilst the parallel market exchange rate nearly reached US$1:$10 000, partly on account of exchange rate liberalisation.
This is what economists call the exchange rate overshooting effect, where the exchange rate shoots before it stabilises following liberalisation of the market.
There are businesses that had stocked and/or are still to receive shipments secured at these exchange rates.
They will naturally find it difficult to immediately adjust to new prices.
As expected, there is a constituency that will always bet against the Zimdollar no matter how it performs.
Naturally, they will take a bit of convincing to price in the local currency.
Their position is further reinforced by economists who believe that it is bizarre for a local currency with an inflation rate of more than 176 percent to sustainably appreciate against the US dollar, whose inflation rate is 3 percent.
They are also convinced that it is practically impossible for the Zimdollar appreciation to continue given broad and reserve money supply growth of 435 percent and 1 730 percent, respectively.
Furthermore, they believe, with Government borrowing of 834 percent, betting against the Zimdollar is always advisable.
While all these numbers may look frightening, they largely reflect increased dollarisation levels in the economy, which is now estimated at 80 percent, up from 60 percent at the beginning of the year.
Monetary aggregates are increasing on account of Zimdollar depreciation.
However, despite this technical reality of monetary aggregates, it is always prudent to take a forward-looking approach to money supply and Government debt.
The impact of stabilisation measures is actually being felt on the ground, as the Zimdollar has become increasingly scarce.
The tight Zimdollar conditions are expected to result in a significant reduction in money supply growth.
The Government contends that even the much-talked-about backlog on creditor payments is not a big threat, as big creditors of infrastructure projects are now being paid a significant portion — up to 80 percent — in foreign currency.
In fact, Treasury maintains that payments to creditors and contractors have actually improved.
The Government has also shown commitment to underwrite the Zimdollar through taxes, duties and other fees payable to Treasury.
This is necessary to guarantee Zimdollar stability.
While losses from downward revision of prices may be inevitable, it is prudent for business to minimise losses by adjusting down their prices early, as all indicators are pointing to sustained Zimdollar strength.
The demonstrable commitment to stability measures only shows that, if the current Government gets another mandate, the trend will continue after the elections.
Persistence Gwanyanya is a member of the RBZ Monetary Policy Committee. He is also the founder and MD of Bullion Group International. He writes in his personal capacity. For feedback, WhatsApp +263 773030691.
