As we move on from the midterm budget review and supplementary budget one of the key talking points will be the decision to stop reporting year on year inflation figures by the Minister of Finance. There has been more than an outcry at this move as people have not taken to the decision well. Even those who generally support the minister’s moves and interpret them with the best of intentions have not had the kindest words. Let’s look a little deeper into the issue.
The minister’s rationale
According to minister Mthuli Ncube prices set prior to March 2019 were set in US dollars at a time when we did not have an exchange rate between the two currencies. The 1:1 fallacy was in place. So any attempt to liken prices prior to them and now would not be an effective measure of inflation. So the minister’s solution is to do away with the year on year inflation figure altogether.
The reality on the ground shows a different position, however. Since the 2016 inception of the bond note, there has been a “rate” or percentage applied. It started at a lowly 5% between bond notes and US dollars. That is to say since 2016 there has been an established exchange rate between US dollars and bond notes. Therefore an exchange is determinable for the RTGS dollar, Zimbabwean dollar and any other name you would like to call it by.
A sinister motive?
Is the ministers real motive behind this sinister? Perhaps not. As we well know the Professor is a mathematics expert and that is putting it lightly. He has tried to bombard us with statistics where possible to show the progress the new dispensation has made. While he has had success (albeit on paper) massaging the trade deficit and budget deficit, inflation has proven to be a stubborn beast.
The trade deficit is down. A real analysis would tell you it’s down because we can’t afford to import, not a good thing. The budget deficit is down as the government has moved wealth from the citizens through the 2% Intermediated Money Transfer Tax to their own coffers. No real expenditure reduction despite singing austerity. Inflation, however, has just refused to bend to the will of the minister. Multiple predictions of inflation going down in this month or that month have thus far left the minister with egg on his face.
Month on month inflation better?
So is reporting month on month inflation a better idea? The short answer is no but it is not without its merits. The rationale here according to the minister is month to month we will have comparable figures, however, we’ve already established this is flawed logic. Month on month inflation for Zimbabwe hasn’t painted a pretty picture either and is in fact more erratic. It is more susceptible to short term shocks and is less reflective of the trend as people experience it.
There is a good reason to focus on the month on month inflation though. In the book, 12 Rules for Life Jordan Peterson speaks about dealing with times of crisis and uncertainty. When you are dealing with a crisis or volatile situation it is wiser to shorten the time period in which you measure your progress. So in a crisis, you may shorten the reporting horizon to week to week or day to day and even hour to hour. Of course, you don’t entirely eliminate the longer reporting cycles but rather focus on the shorter horizon.
Other inflation measures
There are other measures of Zimbabwe’s year on year inflation rate available but these may be much worse than allowing Zimstat to continue announcing. Zimstat has always been accused of under-reporting the year on year amount. The last year on year inflation figure from Zimstat was 175.6%.
Professor Steve Hanke an American based academic has taken a great interest in Zimbabwe’s situation and he states Zimbabwe’s year on year inflation figure for the same period 558%. Leaving this as one of the few available year on year inflation sources would be detrimental to the minister’s efforts. However, Hanke’s measure does take into account the exchange rate and monetary issues. Looking at that figure one can understand why the minister did not favour a similar method.
Why this matters
For the individual on the street, they do not require a measure to tell them the degree and extent of inflation in the nation, they deal with it daily. For businesses there are many issues to consider here, inflation plays a part in determining whether rates of return are worth it or not. For example, if an investment has an annual rate of return that is lower than inflation it has negative real return and is, therefore, a no go. A lot of planning is based on these figures and many have simply said a flawed Zimstat figure is better than no figure at all.
A lot has been left uncertain after this announcement but there are a few things that are certain at this point. Life will continue to get harder for Zimbabweans with increases in fuel and electricity recently announced. The ripple effect is already being felt. Another certainty is the announcement of the July inflation figures in a week’s time. Let’s see how we fare without the year on year figure.