The reality of stagflation in Zimbabwe

The current fiscal year is turning out to be a challenging year for the Zimbabwean economy. The country is experiencing all the features of economic decline from a recession, high unemployment rate, declining corporate earnings and rising inflation. It is very difficult for various market players to comprehend that the country moved from deflation to stable inflation rate to hyperinflation in less than 3 years. Zimbabwe was experiencing price reductions only in January 2017 with inflation rate at -0,65%, ending the year at 3.46% (Average 0.91% for 2017). The latest ZimStats inflation figures show that inflation has quickened to 175.66% for June 2019 (Second highest in the world after Venezuela which last recorded inflation at 282,973% in April 2019). The prices continue rising with anticipated growth in money supply and hikes in prices for fuel, data and electricity continuing to pile more inflationary pressures.

Stagflation is an economic situation in which the inflation rate is very high, economic growth rate declines and unemployment remains high. The name is derived from its two characteristics that are simultaneous; inflation and economic stagnation. Taken together, these two conditions can have devastating effects on any market. This unfavorable combination is a dilemma for the government since most policies designed to lower inflation such as tight controls on money supply, hike in interest rates and austerity measures increase unemployment levels; and policies designed to decrease unemployment such as monitory subsidies and increase in government expenditure worsen the inflation.

Stagflation in Zimbabwe was mainly caused by the rapid growth in money supply from just under $3.2 billion in January 2015 to $10.5 billion in January 2019, high tax burden and production shocks caused by shortages of fuel, power cuts and scarcity of foreign currency to import raw materials. As a result of that, prices have been skyrocketing thereby making production costlier and less profitable, thus slowing economic growth. The growth in money supply meant that aggregate demand for goods and services remained high thereby sustaining hyperinflation.

Stagflation is very costly and difficult to eliminate, both in social and fiscal terms. There are only a few examples in history and the most notable one occurred in the 1970s in the United States. The onset of stagflation In the 1970s was blamed on the US Federal Reserve's unsustainable economic policy during the boom years of the late 1950s and 1960s. The Fed moved to keep unemployment low and boost overall demand for products and services in the 1960s by increasing money supply. However, the unnaturally low unemployment during the decade triggered wage increases and price hikes (inflation) at the same time. The Organization of the Petroleum Exporting Countries (OPEC) oil embargo in 1973 also contributed to this unwanted economic event in the US. Industries across the country suffered from excessive fuel price increases and shortages. Consumer demand fell to new lows and industrial output suffered.

In order to bring stability in the economy through curbing uncontrolled money supply and government expenditure, the Zimbabwean government launched the Transitional Stabilization Programme (TSP) in October 2018. The policy was aimed at implementing austerity reforms within the civil service which will contribute to cost containment, targeting the unsustainable public sector wage bill, currently consuming 90% of the budget. Furthermore the policy aimed to increase tax revenues through the introduction of the 2% Intermediated Monitory Transfer (IMT) Tax, cut budget deficit through cost containment in government spending and privatize State Enterprises and Parastatals (SEP). The privatization programme remains key to weaning off loss making parastatals that continue to burden and pile more debts on tax payers.
 
Proposals to cut or remodel government subsidies in agriculture through the command programme were met with strong resistance from the army and certain stakeholders in government. To date the government has managed to score positives on increasing tax revenues which has resulted in declaration of successive budget surpluses in excess of $443 million by April 2019. This has largely been an easy task considering that prices have been skyrocketing thereby increasing Value Added Tax (VAT) and IMT Tax revenues; while budget figures were fixed since November 2018. IMT tax is now a key revenue channel for the treasury since 93% of transactions processed in Zimbabwe are electronic. The actual results of cost containment in government are still to be communicated so as to assess variance with the targeted budget deficit.  
On the monitory front, government has introduced an auction system in the issuance of new Treasury Bills (TBs) and increased the interest rate on its overnight window to 50% per annum from 15% in a bid to tame inflationary pressures alongside other measures meant to support the value of the local currency. Ordinarily the measures implemented so far should lead to lower inflation rates but alas prices continue to escalate, though there was a temporary reprieve after the intervention of the central bank on the 24th of June.

Part of the reason why the government is failing to bring economic stability is that production has plunged due to unrelenting fuel shortages, daily power cuts and scarcity of foreign currency to import critical raw materials. Corporate earnings in the first half of 2019 have fallen in real dollar terms as compared to the same period in 2017 and 2018 after factoring in foreign exchange rate losses. Confidence in the market remains low and business prospects are shrouded by economic risks. The business sector has largely adopted a wait and see approach by converting excess liquidity to foreign currency. Producers also have to incur additional costs in procuring diesel to power generators so as to maintain production and stay afloat. Job losses in the insurance, manufacturing and mining sectors have been spiking as a result. On March 29 2019, Old Mutual Zimbabwe, which is the largest integrated financial corporation in Zimbabwe by assets and sales, announced that it is going to trim more than 10% of its workforce in a retrenchment exercise. This follows suspension of operations and downsizing by sectoral giants such as Metallon Gold, RioZim, Olivine, Surface Wilmar, Lobels and Delta Beverages earlier this year. Standard Chartered Bank (The oldest bank in Zimbabwe) retrenched more than 100 employees with more lay-offs planned as the bank has begun outsourcing some of its operations in Zimbabwe to countries such as Kenya, Malaysia, China and India.

Once stagflation starts, it is extremely difficult to stop as most policy interventions have adverse outcomes for the economy. The economic conditions in Zimbabwe present challenges to monitory and fiscal authorities. In March, the government announced that its austerity programme will only be limited to 2019 as its not sustainable for a developing country. The central bank views inflation as the elephant in the room though managing inflation may cause higher unemployment and lower economic growth in the short-term. To ensure sustainability, more effort needs to be channeled towards privatization of state entities, supply side intervention policies to improve production and market liberalization to increase economic efficiency. Ultimately, stagflation demands a much more farsighted approach of reforming fiscal policies such as taxation so as to incentivize production and continuous efforts to instill confidence in the market.

Victor Bhoroma is economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.