guest column:Respect Gwenzi
The Monetary Policy Committee (MPC) missed its 10% year-end target for 2019 but it, however, denies that it ever set this target and instead said it had targeted 15% by year-end. However according to a Press statement currently uploaded on RBZ’s website released after the October sitting, the committee clearly set a month-on-month inflation target of between 10% and 12% by year-end.
Against this target, the year end month-on-month inflation outturn came in at 17%, a wide miss. The MPC now forecasts a single digit month-on-month inflation target by end of first quarter and a 50% annual outturn by year-end, premised on exchange rate stability and monetary targeting.
There is scope for further month-on-month moderation based on a stable exchange rate. The exchange rate has been coming off at a much slower rate over the last three months compared to the preceding quarter. Data released by RBZ suggests that flows on the interbank significantly improved in the final quarter of 2019. The annual outturn was at $1,5 billion with $700 million of that total being traded in Q4:19 alone, compared to just $136 million in Q3. Interestingly, the exchange rate tumbled by over 40% in Q3:19 compared to a below 5% decline in the final quarter.
What this suggests is that improved flows on the interbank in Q4:19 helped keep the exchange rate more stable in the final quarter. However there are other factors such as money supply (base money) which significantly rose in Q3:19, which should be factored in as well as the impact of demand.
It is very worrying that the margin of variance between the interbank and the parallel rate widened in the final quarter coming from a conservative outturn in Q3, almost putting to doubt the solidness of Q4 trades.
It would follow that if trades in the final quarter were over double those of Q3, the gap between the interbank rate and the parallel market rate would close, especially where base money is contracting. The parallel market premium closed the year at 35% from 15% in September, a demonstration that more and more demand is not being met on the interbank despite the growth in absolute trades. What is the this demand level?
According to 2018 trade statistics, average daily imports amounted close to $20 million and given the deep shave in 2019, the average imports have slowed down to $13 million a day. This means the country needs $13 million a day or at a more conservative level $10 million to cover for imports demand. Now $1,5 billion traded since February 25 translates to about $5 million a day, which equates to below half of the total demanded forex per day, according to ZimStat data. What this exposes is that there is a far much greater demand of forex than is presently supplied and that disequilibrium is a source of parallel market widening premiums.
To put this into context with regards to inflation outlook, it means if RBZ maintains the status quo of tighter controls on interbank trades, demand will find comfort on the parallel market which would naturally widen further the black market premium. As is the psychology of pricing on the market, prices of goods will naturally follow, rising to maintain the US dollar margin.
It is therefore not a given that inflation is on its way down as the widening parallel market variance shows.
Trade statistics equally show that net exports diminished by about 15% in 2019, which means Zimbabwe’s ability to earn foreign currency has been diminishing.
The MPC also acknowledges that monetary targeting will not be possible if government fails to accommodate subsidy expenditure within its budget, a scenario which may force RBZ to inject new money. Once this happens the base money component of money supply will be affected and as a result markets disrupted. An example of base money effect is that of August 2019 when RBZ injected new flows to cover for outstanding US dollar-denominated Treasury Bills. The result was a run on the currency as new money chased scarce hard currency resulting in a 30% plunge in the exchange rate in September.
Given the ambitious 2020 budget by Zimbabwe’s earning standards (disparity between Zimra collections and targeted expenditure), save to say the budgeted amounts are not enough to cover for recurrent expenditure, it would follow that huge pressure will mount as we get into the second quarter of the year.
This will mainly be driven by the drought effect, underperforming revenue collections, civil service incapacitation and industry production
cutbacks on power and demand dearth.
There are therefore more headwinds on the outlook which brings us to a conclusion that inflation will stun authorities and remain on an upward trajectory.