Zimbabwe Inflation Crisis Precipitated by Poor Policies

HARARE – The article below was prepared by a group of Zimbabwean investors who are concerned about the return of hyperinflation, which, from -7,7 percent in 2009, reached almost 70 percent in March this year. We produce the full report below;


Since dollarization of the economy in 2009, Zimbabwe was plunged into a deflationary environment, in which prices of most products were actually falling. This period came after the economy had gone through a phase of hyperinflation between the year 2000 and 2008, where inflation reached a record high of 231 million percent by August 2008. The major driver of inflation, during this period was excessive growth in money supply, which development buttressed the notion that “Inflation is always and everywhere a monetary phenomenon” by Milton Friedman.

The deflationaryenvironment experienced after dollarization is always a key characteristic in most dollarized economies. It became a cause of concern to businesses as it was accompanied by declining profits and negative implications to foreign direct investment inflows. Similarly, during the same period, foreign currency was readily available to businesses for the procurement of critical raw materials used in the production process.

Rising Domestic Debt

Beyond the deflationary phase, came another episode where Government, in 2012 started borrowing domestically through excessive issuance of Treasury bills (TBs). Debt was used to fund the 2013 harmonised elections as well as the unescapable expenditures relating to civil servants’ wages and salaries. To-date, government’s domestic debt is in excess of RTGS$ 7 billion. This excessive issuance of TBs in the domestic economy resulted in the pumping of excess liquidity in the economy, leading to upward trending of inflation, though within the regions of below 5%.

Introduction of the Bond Note Export Incentive

In 2016, the authorities introduced the bond note in an effort to incentivize exports and to ease liquidity challenges that were affecting the economy.  The bond note was introduced at 1:1 exchange rate with the USD and a fixed exchange rate regime was maintained until 20 February 2019. The export incentive was initially said to be of US$200 million, backed by AFREXIM Bank facility of a similar amount in USD, and an additional US$300 million was also pumped in, monetized by bond notes. This, ultimately, means that an additional US$500 million of money was created and introduced into the economy. Again, during the fixed exchange rate regime, businesses were encouraged to borrow offshore with the assurance that the debt will be extinguished at 1:1 exchange rate.

Separation of Nostro FCAs and RTGS FCAs

On 1 October 2018, the RBZ, through its 2018 Mid-Term Monetary Policy Statement, separated Foreign Currency Accounts (FCAs) into two categories, Nostro FCAs and RTGS FCAs. This, however, brought a huge shock into the economy which destabilised prices. Economic agents interpreted this signal by RBZ as an attempt to devalue their RTGS and bond notes balances, and an acceptance to the fact that bond notes and USD are not at par in value. In order to realise value from their bond note balances, economic agents rushed to buy real goods resulting in panic buying. Year on year inflation rose from 5.4% to 20.9% in September 2018 and October 2018, respectively, as a result of this policy adjustment. This added more pressure on local suppliers to adjust their usual supply schedules.

In addition to high demand, prices shot up, as foreign currency was not in adequate supply through the RBZ allocation system. Resultantly, the separation of Nostro FCAs and RTGS FCAs led to a spike in parallel market exchange rates.

The thriving parallel foreign exchange market forced authorities to criminalise foreign exchange trade on the alternative market. This exacerbated the foreign currency situation in the economy with companies running at very low stock levels of both raw materials and commodities.

2% Intermediated Money Transfer Tax

The price increases of 1 October 2018 were further compounded by the introduction of the 2% intermediated money transfer tax (IMTT) through the amendment to section 22G of the Finance Act, 30th schedule of the income tax, where both the rate and the transactions on which the tax was payable was changed.

Undoubtedly, this 2% IMTT was and will continue to be a burden to consumers and industry. As Government celebrates the positive impact of the 2% IMTT in additional revenues to fiscus, the negative impact of this tax on disposable incomes and company overheads, is reversing these positives.

Suspension of SI 122 of 2017.

Compounded to this, was the suspension of SI122 of 2017 in November 2018, which led to trade deficit widening as traders started importing more goods, increasing the demand for foreign currency. Since the introduction of trade restrictions through SI 122, industry had diversified, and partnered with the agriculture sector, creating a number of jobs and closed the gap on the leakage of foreign currency from the domestic economy through reduced imports.

Due to SI 122, industry had begun to export more, while import growth slowed. According to data from ZimTrade, the country’s trade deficit narrowed by 44% between February to August 2018. Again, capacity utilisation was recovering as a result of SI 122, but the recovery was constrained during the last quarter of 2018, following the suspension of S1 122, evidenced by a marginal increase in manufacturing capacity utilisation from 45.1% in 2017 to 48.2% in 2018.

Increase in Fuel Excise Duty

Another round of price adjustment came through in January 2019, where Government made over 150% fuel price review.  However, the fuel price adjustment led to violent demonstration and destruction of property, further impacting negatively on some cost structures.

While Government promised to cushion businesses against this fuel review, still consumers bear the brunt of such policy measures, given the high level of informalised businesses in Zimbabwe, who cannot qualify for the rebate. Despite the promise to give rebates to registered businesses, businesses are also struggling to access the rebate, and by the time it is processed, it would have lost its value. This leaves the consumers to roast through price increases as businesses try to find ways of offloading the additional costs caused by the fuel price hike.

Foreign Exchange Interbank Market

Further to that, on 20 February 2019, RBZ announced its Monetary Policy Statement wherein, major policy measures relating to the liberalization of the foreign exchange market and the establishment of the interbank market were introduced. The interbank market was supposed to operate on a willing buyer willing seller basis. These measures came after recommendations from key stakeholders, with the expectation that, such a measure will address the biting foreign currency situation in the economy.

However, this interbank market is not operating free of interference by authorities, and this was noted in the recent report of the IMF visiting mission of 1-5 April, 2019. Such interference, unfortunately, is assisting in sustaining the existence of the foreign currency parallel market. Industry continues to struggle to access foreign currency from the interbank market with a premium which is forced on to consumers.

Private Sector Legacy Debts

During the fixed exchange rate era, companies borrowed offshore hoping to liquidate the debt at 1:1 exchange rate as was promised by authorities in return for not hiking the prices of their products in line with parallel exchange rate movements. This was applicable to companies which produced the monitored products such as sugar, mealie meal, bread, flour, washing powder, bathing soap, cooking oil, fuel, beverages, salt, rice, fertilizer, as well as grain seeds, among others. Hence, the introduction of the foreign exchange interbank market meant that companies have to access foreign currency for current invoices.

Further compounding the situation is the lack of a clear roadmap on how to extinguish private sector legacy debts, which is likely to have a negative bearing on inflation and company viability, posing high risks of company liquidation and closures. To safeguard against such undesirable business consequences, companies are coming up with their own initiatives of including a premium on the price of their commodities as a way to liquidate these legacy debts.

These inflationary episodes from October 2018 to February 2019 are shown in the graph below.


Parastatal Reforms

Government continue to burden the ordinary people through adopting policies that are poverty creating. A case in point is a position that Government took to get rid of all its loss making parastatals so that they do not continue bleeding the fiscus in financial bail outs. This position has seen some parastatals finding some survival strategies, with some effecting ridiculous price increases of around 120%. This, obviously, will result in an increase in the overheads of the companies, with the overall impact being a general price increase.

Producer Price Review

Already, on 9 April 2019, Government reviewed the producer price for all cereal crops which include maize/small grains (from $390 to $726/ton), wheat (from $630 to $1089.68/ton), soya beans (from $780 to $918). It then becomes inevitable that another round of price adjustment is looming, with some like stock feeds and most products that use these as their inputs, along the value chains having already effected these price adjustments. This, obviously, will have a direct bearing on the cost of production, cost of food, and, ultimately, on the general price of mealie-meal, bread, meat and other related products. Aggravating the situation is the 2018/19 agriculture season drought as well as the destructive impact of the recent natural disaster, Cyclone Idai.

Labour Cost Push Inflation

Salaries and wage adjustment constitute a cost of production to business with private sector having to emulate their public sector counterparts by adjusting wages and salaries. Government has already effected a salary adjustment of between 13-29%.  Private sector, obviously have to follow suit. This, again is another source of further price adjustment as far as doing business in Zimbabwe is concerned.

Regional Comparisons of Prices of Selected Commodities

Another piece of reality is that, despite the price increases effected in the past few months and days, Zimbabwean commodities continue to remain in the same price range with those of regional counterparts such as Zambia and Malawi in United States Dollar terms. Actually, in some instances, Zimbabwean products are now cheaper than they were during the period 2009 to September 2018, in United States Dollar terms.  This might be a reflection of a price adjustments in Zimbabwe, to realign to prevailing macroeconomic fundamentals as the economy moves away from a highly distortionary environment.

A quick comparison of these prices is illustrated in the table below.

Comparison of Prices in Zimbabwe, Zambia and Malawi

Source: OK Zimbabwe, TM Zimbabwe, Spar Zimbabwe, Zambia big retailers, Malawi big retailers. Exchange Rate: Zambia – 1USD: 12.5 ZMK; Zimbabwe – 1USD:3.14 RTGS; Malawi – 1USD:730 MWK
**The orange shading reflect products that are cheaper in Zimbabwe compared to Zambia or Malawi
***The yellow shading reflect products expensive in Zimbabwe compared to Zambia or Malawi. However some prices differences are marginal, e.g. for cooking oil. *

There seem to be no major variation in basic commodity prices in the 3 countries. In some cases, prices are lower in Zimbabwe than in Zambia and Malawi, while for some products, prices are lower in Zambia and Malawi than they are in Zimbabwe. It becomes imperative that whenever policy makers make comments on prices, there must be a scientific way of determining what is driving these price adjustments and fix that root cause. Blame game and threats is not the way to do Government business as it erodes confidence and is reminiscent of the past conduct that made Zimbabwe an undesirable investment destination.

The only missing link in Zimbabwe are the wages and salaries that are not moving in line with commodity price movements, which should be addressed through a Tripartite Negotiating Forum (TNF), so as to avoid causing the price-wage vicious cycle and a decline in aggregate demand as consumer disposable incomes are eroded by inflation.

At this stage, one can safely conclude that the major driver of all these price increases, is due to unfavorable policy environment (fiscal and monetary) prevailing in the country. It is Government policy measures that are triggering the price increases either through fiscal or monetary measures, with their impact being reflected through price increases. The operating medium is not favourable to doing business and the difficulties are manifesting in form of price instabilities.

Impact of Price Controls

The government may consider the control of goods market in order to protect the consumer to contain inflation. In this case, deadweight loss or allocative inefficiency may result when the free market equilibrium price for a commodity is not achieved. Broadly, price controls may have the following negative consequences to the economy,

  1. Shortage of commodities as they disappear from the formal market if the maximum allowable price is below the equilibrium price. Maximum prices may lead to reduced supply, hence create shortages.
  2. Price controls suppress the actual signals from economic agents, thus, creating artificial demand.
  3. Minimum prices increase the income of producers. Minimum prices are usually set for agriculture products to increase earnings of food producers. Where minimum prices lead to oversupply of a commodity, Government expenditure increases as it buys the excess amount of the commodity as the market fails to clear on its own.
  4. Price controls chases away investors, hence lead to fragile economic growth, loss of employment, loss to revenue to fiscus, ultimately, result in conflicts in the country.

Key Recommendations

In terms of interventions to reverse the obtaining situation, Government should endeavor to urgently pursue the following.

  1. Urgently convene a Tripartite Negotiating Forum (TNF), involving government, private sector and labour.
  2. Allow the interbank market to operate efficiently at a market determined rate.
  3. Lessen burden on formal businesses from excessive taxation, in particular from the 2% IMTT.
  4. There is urgent need to come up with a clear roadmap on how to resolve the private sector legacy debts, while ensuring company viability, product affordability and availability.
  5. There is also need to address escalating cost of utilities e.g. rail transport costs.
  6. Discontinue with unproductive subsidies which are burdening the tax payers, which are creating artificial demands in certain products such as bread.
  7. Develop some sustainable agriculture financing models that crowd in the private sector and discontinue the command agriculture financing. The establishment of a Land Bank can help achieve sustainable agriculture financing as opposed to command economics.
  8. Discontinue all forms of distortions in the economy and allow efficient functioning of all markets, namely foreign exchange, goods, money and labor markets.
  9. Urgently attend to all the ease of doing business reforms to be able to attract the much needed Foreign Direct Investment and ensure the local businesses flourish.
  10. Attending to all these issues holistically and in all good faith will further assist in the restoration of lost market confidence.

Any further delays in addressing the above issues may lead the economy back to the 2007/08 era of economic hardship.