For the second time this year, the Reserve Bank of Zimbabwe has revised its year-end inflation target upwards, this time as high as 53%, from the previous forecast in the 25%-35% range.
In an economic outlook dated September 27, RBZ governor John Mangudya cited a 25% increase in international food prices between 2020 and 2021, administrative fee increases such as electricity tariffs as well as the weakening of the local currency on the black market as reasons for the bleaker inflation forecast.
At the beginning of the year, the central bank had forecast annual inflation to end the year below 10%. This forecast was then revised to the 25%-35% range in August.
“Worrisomely, developments on the parallel market for foreign exchange are likely to exert further inflationary pressures in the economy. In view of recent developments, annual inflation is likely to end the year between 35 percent to 53 percent, up from the revised year-end targets of between 25 percent and 35 percent,” Mangudya said in an update on the economy.
“In addition, the increase in international food and oil prices, as well as global inflation, continue to exert additional pressures in the domestic economy.”
RBZ also sees inflation risks coming pressure for higher government wages, as well as demands by farmers for better producer prices plus government guarantees to farm lenders.
However, as he and his counterparts at Treasury have consistently done, Mangudya maintained the official denialism on the cause and effects of the black market.
Mangudya talked up the current account surplus, now forecast to top US$1 billion from the initially projected US$611 million, as well as foreign currency deposits that he said currently stood at US$1.7 billion as evidence that the economy “is currently generating sufficient foreign currency to sustain the economy.”
“Under normal circumstances, a strong external sector position signals a stronger nominal effective exchange rate,” Mangudya argued.
Except, there is nothing normal about Zimbabwe’s economic circumstances. Or the broken foreign currency auction system.
Very few, apart from Mangudya and his Treasury counterparts, believe an auction system that fails to settle within the promised two days of successful bidding, running up a backlog going back months (US$175 million as at the end of August), is working well. The increased clamour from business and economic analysts is for the system to be overhauled or dumped for a one that guarantees efficient allocation of foreign currency in the economy, like an unfettered interbank market.
By Mangudya’s own admission, the auction system is plagued by rogue players. Mangudya says a huge part of the US$175 million auction backlog, of which US$70 million was reported to have been cleared late September, was “attributable to malpractices by certain entities that were sponsoring multiple bids under the auction system.”
It is not normal that dodgy bids exceeds genuine ones.
There is nothing normal about cooking oil companies, which dominate allocations from the forex auctions, indexing their pricing on the black market rate and not on the official rate. In fact, one would be hard-pressed to find any business, for that matter, pricing on the basis of the official exchange rate.
Mangudya’s idea of normalcy certainly doesn’t reckon with the fact that Zimbabwe has a huge informal economy which mostly trades in forex. That accounts for the massive foreign currency demand that sustains the black market.
Because the authorities have not done enough to restore confidence in the local currency, significant household expenses, such as accommodation, are almost exclusively in foreign currency. Workers on local currency salaries have to buy US dollars to pay rent.
The unseeing eye
According to the government’s own data, Zimbabwe consumed nearly 300 million litres of fuel during the first quarter of 2021. That’s an average of 100 million litres of petrol and diesel worth about US$130 million per month. Most motorists purchase this fuel using foreign currency bought on the black market and this is not insignificant as the authorities seem to believe.
The authorities’ insistence with an auction system that is clearly failing the poorest and the most vulnerable has drawn inevitable suspicion that powerful people and institutions with access are benefiting from the arbitrage opportunities offered by the growing disparities between the official and black market exchange rates.
Despite its occasional threats and the spate of arrests last week, not many would be convinced about the authorities’ capacity, or willingness, to deal with the fertile ground for corruption that the current foreign currency system has created.
Even new measures which allow bureaux de change to sell currency between US$50 and US$500 to walk-in customers who are not catered for by the auction is fraught with corruption on a scale the authorities can never be able to deal with. Inevitably, foreign currency traders, working in collusion with some rogue bureaux de change, are hogging the forex, while poor citizens, the intended beneficiaries of the policy, miss out.
Central bank’s latest report shows that it has seen the simmering inflationary pressure. It is aware of the black market rates, as well as pressures from workers and farmers. What is absent from RBZ’s report is any sign that it is ready to act swiftly and decisively, knowing that a repeat of the policy cowardice of 2018 will certainly yield the inflation that followed in 2019 and 2020.