The key economic indicator of inflation slowed in September, providing further evidence that measures recently instituted are impacting the economy. Year-on-year inflation slowed marginally to 280.4% from a 12-month high of 285%. Meanwhile,, month-to-month inflation slowed massively from 12.4% the previous month to 3.5% in September. Multiple measures were put in place to tame the runaway money supply of Zimbabwean dollars,, which was the root cause behind the recent inflation surge.

Year on year

Year-on-year inflation rate of increase started showing signs of slowing down in August with an increase of 28,1% compared to the previous month’s 65,3% increment.   With analysts expecting the year-on-year figure for September to be 340%, the marginal decline is a most welcome development. Tight monetary control and contractionary policy are expected to continue the decline of inflation. Zimbabwe still holds the world’s highest inflation despite the recent decline.

Month on month

Month on Month inflation radically declined to 3.5% from 142.4% in August. Recently shooting up to a high of 30.7%, a return to levels below 5% falls within the range desired by the central bank. Low month-on-month inflation levels similar to those experienced in September were fostered by a slowdown in the parallel market exchange rate which even registered a decline after reaching levels close to 1000 Zimbabwean dollars for a single United States dollar. Contractionary monetary policy can again claim responsibility for the victory.

Tighter monetary policy

In addition to increase of lending rates and bank accommodation rates, the Central Bank introduced gold coins as a store of value. Thus far 10 000 gold coins have been minted and just over 8 000 been sold according to the August monetary policy committee meeting press release. 95% of these coins were purchased using local currency, reducing the amount of local currency in circulation. This relieved pressure on the local currency against the United States dollar, also legal tender and the main exchange currency in Zimbabwe. Zimbabwe, as a net importer relies heavily on exchange rates to price. While the parallel market rate has ceded to the reduction in local currency, the official foreign currency auction rate has increased to near parity at 613 Zimbabwean dollars for a single United States dollar. Traders and shops are allowed to add a premium of 10% on the official auction exchange rate currently traders can price at 675 Zimbabwean dollars for 1 US dollar, very close to the current prevailing parallel market quoted rates of around 700 to 1.

The monetary policy is paying off on the inflation and exchange rate front, but the availability of local currency is low. With approximately 14 million Zimbabwean dollars of currency tied up in the gold coins for at least 6 months, fewer Zimbabwean dollars will be in circulation. The government also had to institute a freeze on payments to suppliers as Ministry of Finance Deputy Minister George Guvamatanga informed the nation that payments to suppliers increased pressure on the Zimbabweans as suppliers sought to offload Zimbabwean dollars for US dollars at any price as the local currency has proved a poor store of value.

Authorities have a tough balancing act ahead as the limited money supply threatens business flow. Plans are already underway for additional smaller denomination precious metal coins to be provided additional store of value options. Payments to government suppliers also need to start flowing soon. Else, a disruption in service delivery may hit a government that is already struggling with managing economic fundamentals. Gold coins were introduced at the end of July, and we edge closer to the first coins sold under the program becoming eligible for redemption. It is unclear yet if and how many will redeem their coins, but if it is done at a significant level, the money goes back into circulation. At present, the central bank has chosen to hold all things as they are while the economy cools down.