Towards price stability in the new economy.

Towards price stability in the new economy.

Perhaps the biggest challenge that the economy is suffering from lately is the emergency of price instability, with the general price levels for most commodities having risen by a significant margin over the past twelve months. Latest Year on Year inflation figures for the month of December 2017 point to a 0.49% increase in headline inflation, up from a previous level of 2.97% to close at 3.46% according to Zimstats. The subject of inflation has been a target to much speculation, with some independent researchers like Prof Steve Hanke pointing to an inflation rate as high as 348% if the Old Mutual Implied rate (OMIR) is used as a reasonable estimate of Zimbabwe’s actual rate of inflation. This article will explore the possible measures that need to be implemented if the economy is to move towards price stability as a necessary step in the whole quest to revive the country’s economic fortunes. Eliminating the forex parallel market The foreign exchange market has been characterised by a triple price mechanism with three unofficial exchange rates existing amongst the Bond notes, the US Dollar and RTGS/bank transfers. This has led to an untenable situation where foreign currency has become expensive to acquire with US dollars on the parallel market selling for as high as 40-45%. This state of affairs is largely to blame for the price instability that the economy has witnessed over the last few months, with the most notable being the madness of September 2017 when panic hit the market as people engaged in speculative purchases as they feared the return of the ghost of 2008. Because survival is key in any business, most companies pass on the exorbitant cost of acquiring foreign currency to the customer and hence the increasing price levels. Almost inevitably foreign currency has become a silent component of the country’s consumer price index and probably occupies the biggest weight. This state of affairs brings inflation headwinds and price instability. Inorder to arrest this challenge there is need for the authorities to float the bond note and or RTGS exchange rate to the US dollar. This in essence means the exchange rate will be determined by market forces of demand and supply as opposed to the fixed rate of 1:1 as recommended by the Central Bank. At the centre of such a system should be the market players who in this case are the registered commercial banks. The moment banks are allowed to be the biggest players in this market, then whatever is happening in the parallel market today will be carried out using formal channels. This eliminates the aspect of speculation which forms a big component of the parallel market rates.

Zimbabwe Financial Analysis

Lowering the cost of fuel The price of fuel in Zimbabwe has been the subject of passionate debate as most people point to its uncompetitiveness compared to other countries in the SADC region. It is important at this occasion to highlight that the biggest factor that feeds into the price of fuel in Zimbabwe are the levies and taxes that add up to almost $0.60c per litre. This state of affairs has inescapably led to an overall increase in the general level of prices of most commodities as fuel is considered to be a baseline cost since it feeds into every facet of the economy’s cost structure. Whilst recent efforts by the government to reduce the levies and taxes by almost $0.06c are commendable, this reduction still falls short of being significant enough to cause a massive reduction in the consumer price levels for most goods and services. It is important to note that in January 2015 the government increased the levies and taxes on fuel by almost 33% from $0.35c to $0.45c. This was about the same time that the price of crude oil had fallen below $45/ barrel and ideally the customer should have enjoyed a price reduction of over 30%. What the increase in the fuel levies and duties did was to eliminate the benefit due to customers courtesy of the price reduction and the fuel prices were maintained at exorbitant prices as the increase in the duty component was almost commensurate with the decline in the crude oil prices on the world market. A massive reduction in fuel prices brings with itself an increase in consumer disposable income since fuel is a huge component of most Zimbabweans’ consumer basket. In fact there is potential for the country to realise more revenues from value added tax that accrues courtesy of the growth in consumer demand post fuel price reduction as consumers have more and more disposable income.

Export oriented production With Zimbabwe’s capacity in mining and agriculture, price stability can also be restored on the back of an export oriented productive economy that places emphasis on the exploitation of the agriculture and mining value chain to add value to our exports and earn the country foreign currency. With this in mind, efforts can be channelled to value addition in such areas as cigarrete manufacturing and exports, cotton ginning, mealie meal production, stock feeds production, diamond cutting and polishing amongst a host of other measures to add value to our exports. The government should also move with speed to operationalize the Special Economic Zones with a specific mandate to boost the country’s export and production capacity so as to equip the economy with the much needed foreign currency that helps the market approximate to a more stable pricing regime free of foreign exchange premiums that come as a result of shortages. Import Substitution Married to an export oriented production strategy above should be a robust local production system that enables local manufacturers to produce direct substitutes to commodities and services we are currently accessing from other countries. A case in point is that of the 300MW of electricity that ZESA is currently importing from Eskom of South Africa. Local solutions can be explored around solar, wind energy and or the resuscitation of idol power stations and in the process save the country huge sums of foreign currency. Another quick win on the import substitution will be the revival of the once vibrant local textile industry which has since been taken over by cheap Chinese imports. An import substitution strategy coupled with export oriented production will reduce the country’s balance of trade and save the economy essential foreign currency. This terminates into a more stable pricing mechanism that is sustainable in the long term. Congruence between business and the government key to all the recommendations above is the goodwill that exists between business and the government. There is need for the two parties to develop a working relationship based on mutual trust. Quite notably the Confederation of Zimbabwe Industries (CZI) almost immediately responded to the government’s reduction in fuel levies by promising the public of an at least 5% decrease in prices for most basic commodities on the back of the government pronouncement on fuel. More of such is needed if the economy is to move towards price stability. In conclusion the coterie of measures recommended above have the potential to revive the economy’s fortunes and help the economy shack off a wave of price instability that has characterised the operating environment over the past few months. Let the good times roll! Cover Pic Courtesy: vectorstock.com