The recently published ZimStat poverty datum line has raised eyebrows in Zimbabwe. While the 4.4% increase in the Poverty datum Line (PDL) for a family of 6 is consistent with the recently reported month on month inflation of 4.37 per cent, it hasn’t always been. Furthermore, in the absence of exchange rate movement on bot the parallel market and the official Reserve bank of Zimbabwe Foreign currency auctions, there are growing questions over the real reason for price increases.
The PDL for a family of 5 was up to ZWL$18750 from ZWL$17859 the previous month. That is ZWL$3750 per person. With teacher salaries recently increased to somewhere around ZWL$19000 making government the best payer according to finance minister Professor Mthuli Ncube. The salary increases are well overdue and there are reports, though unsubstantiated of teacher attendance rates since increasing.
Exchange rate stability
Exchange rates have been largely stable within the country. The parallel market has been stuck somewhere between 90 and 105 Zimbabwean dollars for 1 US dollar for months now. The spread depends on the size of the transaction. In the auction, the Zimbabwean dollar reached its 15th consecutive week in the 80s (the highest it’s been is 83.3994) so foreign exchange via that market is also stable.
So why are things going up?
This is the biggest question out there right now. I will resist the urge to go into behavioural economics theory and just focus on a question I bumped into on Twitter that I think the answer to will help bring things to light. The question was if the poverty datum line was constant in US dollars. Now the reason I find this is interesting is not an obsession with calculating things in US dollars but it does help us compare things over time. The meaning of 10000 Zimbabwean dollars in January and in October are two very different things.
The official exchange rate spent months stuck at 25 before trading on the auction market around mid-year so it cannot be used to compare data that predates it. We will therefore use the parallel market rate which we have historical data on. The graph below paints an interesting picture. Comparing data from march 2020 to date we see that the poverty datum line shrunk towards the middle of the year going as low as US$120 in May as lockdown set in. From there is started a rebound in June increasing by 5%. The increase accelerated rising 12.42% in July and 21.80% in August. September and October show a slow down to 3.57% and 4.99% respectively.
There are a few causes of this. While we know that businesses have long priced in US dollars even when they were not allowed to, the reintroduction of US dollars as legal tender opens us up to the scourge of US dollar inflation that we experienced between 2013 and 2015. There is little correlation between month on month inflation and the poverty datum line which should really not be the case. Some prices, especially those controlled or heavily influenced by authorities have lagged behind exchange rates. So the price increases are a way of catching up. As inflation somewhat comes under control it will be interesting to watch the movement of the PDL particularly in US dollar value.