Zimbabweans can expect inflation to decline and much faster in the coming months. That is if they place faith in the words of outspoken monetary policy committee member Eddie Cross. And while this could be very early to call it the evidence is in his favour. Year on year inflation took a dip for the first time in a long time and the latest foreign currency auction produced another marginal appreciation round for the Zimbabwean dollar. The auction also produced a record high allotment suggesting the auction system can accommodate more bidders.
Inflation to fall faster
Cross said these words as reported by the Herald. On the surface, it is an appropriate appraisal of matters but we need to look at the historic trend of the month on month inflation which can bubble around. Negative month on month inflation is a bit too far but certainly, low month on inflation is achievable if the centre (exchange rates) can hold. With borders opening up and business hours being extended, we are set for an increment in economic activity. The businesses that are about to open up access their money from the parallel market so while a Stabilisation of the auction rate is great we have to keep eyes on a Stabilisation of the parallel market, which has thus far been the case.
By removing big business from the parallel market and tightening Zimbabwean dollar money supply the Reserve Bank has made a great first step towards making sense of what could only be described as a madhouse. The size of the players left to the parallel should not largely influence a rate push as we have seen in the past and so prices should also be contained. If things remain as they are.
4 weeks and counting
The Zimbabwean dollar recorded its 4th week of gains on the auction market. Also recording its highest ever allotment in a single week, at US$31.6 million which is a jump of just over 50% from the previous weeks US$21 million. The tinkering by the team at then RBZ to improve the US dollar supply on the market has worked. One small concern would be how bids are being rejected. 35 main auction and 22 SME auction bids were rejected and the RBZ claims these disqualified because they were for non-priorities. Further information would be of great value. The blind auction was instituted for a purpose and this must not be taken lightly. As we achieve stability, if this is it, more information would help us both understand and accept it.
The weighted average auction rate moved down from 81.71 to 81.450, a 0.03% appreciation. Small but positive is positive and with the weighted average rate being in the range of 80 to 84 over the past 7 weeks Zimbabweans will breathe a sigh of relief. Similar experience on the parallel with rates ranging between 85 and 90 for just about 3 months now is most welcome for stability.
As activity increases the demand will certainly grow on both markets. With more and more business being done in US dollars since they were brought back into legal tender as the coronavirus pandemic hit the economy we expected the move was designed to start the foreign currency flowing so the government could have access. This move has so far paid off. The RBZ is said to buy excess foreign currency supplies on the auction market at the weighted average rate. Are they building reserves?
It’s on the backdrop of these results that Mr Cross makes the bold prediction that we will see negative inflation in the coming months. It’s not impossible just unlikely. This is not helped by the fact that we have heard these same words before from both Finance Minister Professor Mthuli Ncube and Reserve bank governor Dr John Mangudya; with no results. Zimbabweans have long suffered and it seems there is a fixation on a quick fix when we forget that we waded into our economic problems. Money supply growth started as a gradual process that blew up exponentially. While we would certainly want things to be fixed sooner managing our expectations when it comes to timeframes may serve us better.