Zimbabwe's economy heads towards stagflation

Published: 26 April 2019

Economists have warned that Zimbabwe risks sinking into stagflation on the back of a simultaneous occurrence of increased inflation, galloping prices, low domestic demand, rising unemployment coupled with low production, and dwindling economic growth.

Economists and market observers who spoke to Business Times this week said the country was already in a stagflation trap, the same as the one that affected European economies in the 1970s.

The existence of the above factors, which are normally used to determine if an economy is likely to plunge into stagflation, make fiscal and monetary policies less effective.

Generally, these result in supplyside inflation, a downswing which reduces aggregate demand and forces many companies to cut back on output, thus resulting in serious workforce layoffs.

The experts said the two economic indicators - lower output and higher prices - co-exist and feed on each other.

John Robertson, one of Zimbabwe's best economists and economic commentators, told Business Times that the country's economy was "in danger of entering into the danger zone, which is stagflation".

"High inflation is making us uncompetitive," he said. "If it continues like this and prices of basic commodities continue on the northward trajectory, we will slide into stagflation. We can reverse this inflation, which is getting out of hand, only if we can get our policies right."

Albert Makochekanwa, a professor of economics at the University of Zimbabwe, said no country needs stagflation because producers would not be motivated to produce more because of high costs.

"We can't afford [a stagflation] because it's expensive," Makochekanwa said. "In our case, there are many indicators and factors likely to cause that; there is no improvement in prices of goods, no improvement in the cost of production, and no improvement in inflation which continues to rise.

"While we can't afford the high prices, the high inflation and low production, salaries are not making any meaningful movement. They are being eroded significantly instead."

Another economist, Godfrey Hwande, agreed, saying the high inflation figures are a signal that the "heat is on [towards stagflation]".

"The economy will soon plunge into stagflation or we are already in that trap," he said. "And the government appears to be failing to find methods of cooling the economy. High inflation will hurt profits in some sectors as well as trimming payrolls."

According to the Keynesian school of economics thought, which was named after the British economist John Maynard Keynes, if an economy slows down, unemployment will rise, but inflation may fall.

It suggests that the central bank, as part of efforts to promote growth, should increase the money supply to drive up demand and prices without being terribly concerned about inflation. According to the same theory, the growth in money supply would increase employment as well as promoting economic growth.

Fiscal and monetary authorities normally respond to such potential dangers or recessions through expansionary policies, yet inflation is normally fought through contractionary policies. This means the current situation in Zimbabwe places Finance Minister Mthuli Ncube and Central Bank Governor John Mangudya in an invidious position.

This is because the economic tools to deal with such a crisis were built on the assumptions that rising inflation and rising unemployment would not happen concurrently.

This means, they need to think differently because Zimbabwe has been caught in a situation akin to stagflation, with prices rising rapidly, resulting in a spike in inflation as unemployment also rises.

Last year, it was estimated that more than 90% of the potential workforce of the country was not formally employed or was in the informal sector.

The current economic downs turn has seen the country's annual inflation, as measured by the Zimbabwe National Statistics Agency, jumping to 66,80% during the seven months to March 2019, from 5,39% in September 2018, due to rampant increases in prices of basic commodities, which have piled pressure on long-suffering Zimbabweans.

The recently introduced currency, Real Time Gross Settlement (RTGS) dollar, has been weakening on the interbank and parallel markets, pushing up prices of a variety of goods and services.

This week, the RTGS dollar has lost about 24% of its value against the greenback in the formal interbank market. Currently, it is trading at 1:3.1 against the US dollar. The official exchange rate of 1: 3.1 is however 1.9 points or 61% lower than what is prevailing on the parallel market, where the RTGS dollar is trading at five times the greenback.

Experts say the volatile exchange rate is a double-edged sword, which cuts either way.

While the depreciation of the RTGS dollar may push up exports depending on the price elasticity of demand, it may also ratchet up domestic prices by restricting imports and raising the costs of raw materials.

The weakening of the RTGS dollar against the US dollar increases costs for importers, thus reducing profitability.

Several other analysts this week gave a dreary view of the economy and the interbank market, saying it has failed to perform to expectations.

"The interbank rate at the moment has failed to perform because banks are not giving out foreign currency, Robertson said. "Most companies are forced to go to the alternative market, which is the black market, where the rate is 1:5. People who have the foreign currency do not want to put it in the formal market. We are not in a free market. What we want is the need for the government to back off, so that it becomes tradable."

The continuous depreciation of Zimbabwe's local currency is largely behind the rising trend of inflation, listed firms have said.

Herbert Nkala, FBC Holdings board chairman, said inflationary pressure "remains a cause of concern and its effects have been felt in our operations through a general increase in the cost of doing business."

Truworths CEO, Bekhitemba Ndebele, said inflationary pressures would continue to erode consumer purchasing power and confidence. "The impact of the new monetary policy is still to be felt and in the shortterm, shortages of foreign currency will persist," he said.

Zimbabwe's problems have been compounded by fuel prices which have gone up by 149.3% to $3.42 per litre of petrol this week from $1.38 per litre in January 2019, and $3.20 per litre of diesel from $1.32 per litre in January, representing a 188% increase.

The petrol price has been going up by $0.01 per litre every week since January this year. This week, the price went up by $0.02. Fuel increases are one of the biggest cost drivers.

Analysts say the relentless price increases in fuel will trigger even higher production costs for companies, which will, eventually, be passed on to consumers. This will result in low demand of products, meaning it will be harder than ever for companies to make meaningful profits.

Further, workforce layoffs are inevitable as several companies grapple with the punitive realities of high inflation and exchange rate-induced losses. For example, Old Mutual Zimbabwe has already warned that it would trim its workforce this year due to economic slowdown.

Sifelani Jabangwe, president of the Confederation of Zimbabwe Industries, said the worsening economic conditions have left businesses worse off as they are battling mounting costs fuelled by rising inflation. This, he said, has left companies feeling the pinch from depleting demand of goods and services.

Jabangwe said the interbank market was almost dry, with very few sellers, forcing desperate companies to continue sourcing foreign currency from the black market where premiums are punitive and these are simply passed on to consumers.

"As businesses, we want stable operating conditions but as the case is now, the economic conditions have worsened, and this has a negative impact on companies," Jabangwe noted.

"Even the introduction of the interbank exchange rate has failed to improve the situation as it is based on willing buyer-willing seller, so in the end we have more desperate foreign currency buyers but there are no sellers at the official interbank market."

Jabangwe said the continuous weakening of the local currency against the US dollar was likely to trigger further price increases of basic commodities.

He said the government was continuously availing scarce foreign currency for the importation of fertilisers and wheat, instead of supporting local production.

In a statement accompanying Masimba and Proplastics financial statements, board chairman Greg Sebborn noted that the operating environment remained constrained due to continued shortages of foreign currency in the formal market, increasing activity on the parallel market at high premiums.

"The exorbitant pricing of foreign currency, regrettably, pushed inflation to unprecedented levels," Sebborn said. "The inflationary pressures have an adverse impact on current and potential projects resulting in significant business slowdown.

"From the last quarter of 2018, demand has been generally subdued and this has continued into the first quarter of 2019. Although we welcome the recent changes contained in the monetary policy statement by the central bank, we are still to see its impact in stimulating business performance and easing foreign currency bottlenecks," Sebborn added.

CABS chairman, Washington Matsaira, weighed in projecting a tough 2019, saying risks linked to foreign exchange shortages and the relationship between income and expenses under inflationary conditions have escalated.

"It is vital that all stakeholders play their part to stabilise and strengthen the platform on which a strong and sustainable business can be built," Matsaira said.

Japhet Moyo, the Zimbabwe Congress of Trade Union (ZCTU) secretary general, said the pressure for workers was bubbling up. The recent fiscal and monetary policies announcements, he told Business Times, have left the labour force worse off as the chaotic and higher prices of basic commodities were giving them less purchasing power than they had in August last year.

"On the income side, there hasn't been any significant movement at all compared to the surge in prices across basic commodities," Moyo said. "Very few sectors have awarded increases in wages and salaries. This has affected many workers.

"As a result, they are now unable to sustain their families. They are not able to send their children to school. People are not able to visit their sick relatives in the rural areas. I think that has been bad for workers."

ZCTU president Peter Mutasa said there was plenty of evidence that workers were "struggling and carrying all the load of the economic crisis". Their incomes, he said, had shrunk to the lowest levels in the last decade. Inflation has significantly eroded the values of wages.

"Salaries have been seriously eroded due to inflation and exchange rate losses.

The majority of workers are unable to pay for transport, rentals, food, clothing and school fees, among others," Mutasa said, adding that the situation was dire as many families of working class people are food insecure.
- Business Times

Tags: Zimbabwe,