Zimbabwe inflation on downward spiral?

The introduction of gold coins and a review of payment methods for suppliers of goods and services, particularly those undertaking major national infrastructure projects, is expected to see a decline in monthly inflation for the foreseeable future.

Month-on-month inflation declined from 30,7 percent in June to 25,6 percent in July on the back of the tight monetary policy stance being pursued by the Reserve Bank of Zimbabwe.

In the first week of the introduction of gold coins, 1 500 were bought and an additional 2 000 gold coins, each going for a little-over US$1 840, a price dependent on the world price of gold plus the 5 percent minting and distribution charge, or almost $860 000, depending on the daily interbank rate, would be released into the market this week, as efforts to tame inflation continue.

With around 85 percent of the coins sold for local currency this is local currency being switched from the black market to the gold market, thus removing a lot of pressure that was feeding inflation through the flooding of the black market with local currency.

The continued acceleration of the black market rate will be curtailed and possibly stopped.

The Monetary Policy Committee of the Reserve Bank met on July 29 to review the impact of the recent monetary policy measures on the economy.

The MPC noted that month-on-month inflation declined from June to July and noted that the "progressive decline" will continue in the outlook period.

In a statement yesterday, RBZ Governor Dr John Mangudya said the MPC also noted that the disinflation trend would be reinforced by measures that Government was taking to deal with factors that destabilise the foreign exchange market, particularly by reviewing the basis and framework for payments to its suppliers of goods and services in its quest to stabilise the foreign exchange market and enhance value for money.

"The MPC further noted that whilst monthly inflation is expected to continue to decelerate during the outlook period, annual inflation will continue to increase up to September 2022 as a result of the lower base effect in 2021," he said.

"In view of the said developments and outlook, the MPC resolved to maintain the interest rates at current levels. The tight monetary policy stance would be buttressed by the favourable uptake of gold coins which were introduced in the economy on July 25, 2022 as an alternative stable financial product for store of value.

"A total of 1 500 gold coins were sold by the Bank's agents during the first week of their release into the market, with 85 percent having been bought in local currency and the balance of 15 percent in foreign currency. An additional 2 000 gold coins will be released into the market during the week commencing 1 August 2022."

Dr Mangudya said the MPC would continue to review interest rates on a regular basis in line with month-on-month inflation developments.

The RBZ raised interest rates to 200 percent late June from 80 percent to repel speculative borrowers who were using the money to attack the local currency through buying foreign currency on the parallel market at high rates, causing price increases.

The retained interest rates of 200 percent a year makes it even economically unviable to borrow money to buy gold coins, even if the borrower can con their banker into making a pure non-productive loan.

In a separate interview, Dr Mangudya said the Reserve Bank expected some individuals and companies with high local currency balances to channel their money towards gold coins and not the forex on the parallel market.

"For starters, the gold coins are a stable alternative investment product for a store of value. They reduce excess local currency balances which were chasing forex on the parallel market. Through that way we expect the parallel exchange rate to continue to fall, which is good for price stability which is our main focus area. The prevailing high interest rates will safeguard against speculative borrowing to purchase gold coins.

"We need to be a positive society for the common good of the country," said Dr Mangudya.

A number of central banks across the world, including those for the euro and the US dollar, have resorted to raising interest rates to reduce the chances of people borrowing for speculative purposes.