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Zimbabwe inflation target feasible, says IMF

by Staff reporter
09 Mar 2020 at 20:11hrs | Views
THE International Monetary Fund (IMF) says Zimbabwe's target to reduce annual inflation to 50 percent by the end of the year from 500 percent in December 2019 is achievable.

IMF's representative Patrick Imam, however, said the central bank should exercise financial discipline to achieve this feat.

"Yes, technically it's absolutely feasible," he said in an interview. But this requires discipline and above all, stopping the printing of money to finance quasi-fiscal expenditures. In addition, this target would require that monetary policy be improved, through the introduction of a fully implement of the reserve money targeting framework. It is the rapid growth in money supply which is driving the sharp exchange rate depreciation and high inflation."

Imam added that stabilising macroeconomic conditions will require the Reserve Bank of Zimbabwe (RBZ) to achieve moderate reserve money growth.

"The introduction of short-term instruments that were announced in the monetary policy statement to allow the RBZ to conduct open market operations would facilitate the operationalisation of the reserve money targeting framework," he said.

Reserve Bank governor John Mangudya last month held Zimbabwe's key rate at 35 percent on in an effort to rein in inflation that skyrocketed to above 500 percent at the end of 2019, according to various independent experts.

The plunge in the currency underscores the shortage of foreign exchange in Zimbabwe, whose gross domestic product (GDP) contracted more than six percent last year, leaving half the population in need of food aid.

The chaos has spread to the stock market. The main equity index in Harare has risen 69 percent since the end of 2019 as Zimbabweans, who are restricted from moving money abroad due to capital controls, rush to protect their savings from inflation.

The country's manufacturers are struggling to access the foreign exchange they need for imported supplies through the banking system.

Imam noted that Zimbabwe's inflation — the second highest in the world after Venezuela and the highest in Africa — was being driven by drought and money supply growth.

"The inflation number is driven by two factors. The drought, which has affected prices across sectors through food shortages and electricity challenges and the expansion of reserve money which has led to a depreciating currency and imported inflation," he said.

"Inflation driven by the drought is in principle temporary. But with global warming particularly impacting this part of the world, the authorities should continue to pursue their drought mitigating efforts, so that future drought episodes become less inflationary."

The IMF boss also indicated that it was key for the authorities to address the issue of land tenure, which would go a long way in promoting agricultural investments, particularly irrigation development and dams, which renders agriculture more drought resistant.

Source - dailynews