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Price stability to force inflation down

by Staff reporter
30 Aug 2020 at 03:27hrs | Views
The growing price and exchange rate stability following the introduction in June of the forex auction, coupled with a cocktail of measures by the Reserve Bank of Zimbabwe (RBZ) to support the platform, will result in a gradual decline in inflation, economists say.

On June 23, 2020 the RBZ introduced the foreign exchange system to replace the interbank market that had been in use since February last year after it failed to yield the desired results.

The bank had temporarily adopted the fixed exchange rate regime in March for certainty of pricing after the outbreak of Covid-19, which worked well until the gap between the official and open market rates became too big, forcing holders of forex to withhold their money.

Since the majority of businesses did not have access to forex, the continued use of the alternative black market to procure forex for both critical and imports, exerted pressure on the rate, whose pass through effect caused inflation to rise rapidly.

The central bank was forced back to the drawing board to find a viable solution that would help stabilise the exchange rate and consequently inflation, which was eroding workers' incomes and local currency savings, as it ravaged the value.

And the foreign currency auction, which caters for both big enterprises and small and medium businesses, has suddenly become the biggest source of foreign currency for importers and accounts for over 88 percent of their needs, which has taken a great deal of pressure off the exchange rate.

The Zimbabwe dollar exchange rate against the US dollar has moved from 53 to 1 on the first day of the auction to 83,9 to 1 at the last auction, which was only 0,58 percent increase on the previous week's weighted average rate, underlying its growing stability.

The bulk of the foreign currency allocations since the auction system was introduced, has gone towards procurement of raw materials, machinery and equipment, as authorities place emphasis on ramping up local production to cut on Zimbabwe's huge import bill.

Economist John Robertson, said the auction system and other support measures introduced by the Reserve Bank, such as tight control of money supply growth, caps on mobile money transfers, suspending or abolishing bulk payment mobile facilities and integration of all national payment systems with ZimSwitch, will bring down inflation.

Prior to introduction of the auction system, there was no systematic or market led price discovery, most businesses used the forward pricing strategy to beat anticipated increases in the exchange rate and inflation, a scenario that provide impetus and hotbed for unsustainable increases in Zimbabwe's inflation.

"The positive impact will be that inflation is going to come down, but it will take some time or a few months before inflation starts coming down because a number of businesses had already bought their products and would want to recover their costs first," Mr Robertson said.

He pointed out that there was need to ensure that farmers get back to producing key and strategic crops in quantities that are adequate to feed the whole nation so that the country can reduce the food import bill, save the foreign currency, generate more exports and reduce pressure on the exchange rate.

Another economist and member of the RBZ monetary policy committee, Mr Eddie Cross, concurred with Mr Robertson's sentiments saying the auction system would lead to stability of prices and fall of
inflation, which has been on the rampage since the local currency was floated last year.

Zimbabwe's annual inflation has raced from a lowly 5,39 percent in September 2018, just before the central bank signalled plans to reintroduce the local currency, to 837 percent by July.

Mr Cross said apart from measures that have been taken by the Reserve Bank of Zimbabwe to instil and restore discipline with the mobile money system, the central bank was working tirelessly to keep money supply growth on a tight leash.

Since the introduction of the auction system, most prices for local products have relatively remained stable, affording consumers relief as they are now able to budget.

Source - sundaymail