‘Let’s guard against the hyper-inflationary trap’
On September 23 this year, Zimbabwe was engulfed by mayhem which was fed by fierce speculation on social media about unsubstantiated claims that the country will soon run out of fuel, cooking oil and other basic commodities. This latest episode of mayhem,
RM: In your opinion, what do you think triggered the recent wave of price increases and hoarding of products? CM: Indeed, recent events which saw a number of products disappearing on the shelves of a number of retail shops was an unfortunate happening. It’s my firm belief that speculation, dominance of the informal sector as well as panic following unsubstantiated claims of new bond notes being printed to mop out the existing greenback were some of the reasons for the recent events. However, it is also vital to appreciate that shortage of foreign currency remains the primary reason for these distortions which are threatening to derail the progress we had made so far as business and industry since the promulgation of pro -business interventions such as the SI64 of 2016. RM: To what extent can we blame the social media for fuelling this problem which sparked fears of a return to the 2008 period which was characterised by a currency crisis and shortage of products? CM: It is certainly a factor one cannot discount to look at the role of social media in spreading such malicious, unsubstantiated rumours regarding the state of the economy. What causes social media to become a harbinger of pandemonium is the zero cost attached to it in transmitting information, if such social media platforms were priced even 20 percent above their average cost price, such negative information might not be spread easily. This erosion of transaction cost means continuous information flow and once information flows at this rate the probability of transmitting a component of information which is unsubstantiated also rises. However, it is pertinent to appreciate that the consequences of bad information by social media are not unique to Zimbabwe, Facebook attracted rabid criticism in Germany following their recent domestic elections as it carried damaging news, in neighbouring South Africa, I think you are aware even the stories relating to state capture mainly by the media are stirred from tweets. As a nation, I think we just need to learn how to embrace social media for business reasons not to ride on it to post reckless stories which are damaging. Indeed social media fuelled the shortages we were experiencing last weekend. RM: Apart from social media, what other factors do you think could have aided the sudden rush to stock up fuel and other products? CM: You know whenever speculation and arbitrage find space in any economy, hoarding and shortages follow. The market belief was that after isolated service stations ran out of fuel, panic spread leading to hoarding of the commodity. In other words, we can say little shortages in some places created massive shortages, so it’s a case of shortages creating more shortages. The behaviour of some fuel agents to avoid RTGS transfers also created the challenges, once consumers become aware that the bulk of their mode of payment is facing challenges, they resort to hoarding in order to smoothen out expected shortfalls, that is what any rational market player does when faced with uncertainty. We also had instances where black market traders buy products at PoS, then resell them in the black market at a premium, and in many cases demanding the bond notes as a means of payment. RM: Do you think the three-tier pricing on the market contributed to this problem? CM: Obviously, the three-tier pricing system creates market distortions and is inflationary given that a number of domestic exchange rates will be created leading to domesticated or locally manufactured inflation which is contrary to the conventional imported inflation phenomenon which emanates from exchange rate risk between countries. Once the RTGS balances are heavily discounted, then a trend of rising inflation in the formal sector arises, and within black market. Cash is more common, but the cycle then creates shortages hence the challenges we are grappling with today. The 3-tier pricing system is also a haven for externalisation as the central bank will only be left to become reactionary with the greater chunk of the monetary policy being set from the streets. No interest rate policy can be mooted as a monetary policy tool where the three- tier pricing system is alive. RM: The Government and Industry have pledged to work together to allay the fears on the market. How best can the RBZ, Government and Industry address this problem before it gets out of control? CM: I think as a tripartite, we need to appreciate and separate symptoms from the actual challenges. At times shortages come about given that foreign currency is in short supply, this means we are bound to experience some of the shortages given the import-dependent nature of our economy. What is therefore vital is to have an appreciation of what degree can shortages be spurred by forex shortages. This is the reason why as the Zimbabwe National Chamber of Commerce we are carrying out a survey titled “Understanding the Nature and Dynamics of Informal Sector in Zimbabwe” which will be launched by end of October. By promotion of research, we are assisting the Government in finding lasting solutions to our challenges. A year ago, one of our challenges was liquidity, today too much liquidity is posing unintended consequences to the economy, so you can see how the cycle can be misleading if research is not promoted. In addition, we have to agree as parties in this to make sure we don’t resort to price controls as they can lead to even more shortages. Our strategy as business is to restock the shelves to the brim and see how the consumer market will
react to it. Thirdly, we have to agree to address the misaligned fundamentals which are also wreaking havoc. These include fiscal deficits, trade deficits, corruption both in the public and private sector, value addition of our primary products as well as expanding our major foreign currency earners beyond the usual five sources which include gold, platinum, diamonds, tobacco and chrome. RM: Do you think consumers too, have a role to play in the stabilisation of the market? If so, how? CM: Unfortunately in most of our markets, consumers tend to be at the receiving end and as business, we need to build confidence of the consumer. Once a consumer cannot trust our quality standards, our pricing philosophy and our competitiveness, they tend to look elsewhere through either smuggling or foreign purchase. We cannot foist our products on consumers, but have to strive to meet best practices and that way, the market will grow. RM: Do you think the $600 million Afreximbank loan facility can help stabilise the economy particularly in the coming festive period characterised by bonuses, high demand for crop inputs, food and other critical imports? CM: The $600 million Afreximbank facility is a welcome initiative and I think it is important to salute the central bank governor for taking all steps to address the balance of payments challenges we are in. He had been so much involved with the private sector. If we look at a number of facilities he has introduced which includes the women entrepreneurship, youth fund, SME facility, horticultural facility and the export incentive facility which marked the introduction of the bond notes facility. At times it is easy to criticise, but if we look at the mammoth task before Dr (John) Mangudya, I for one will not envy his position at this hour. The Afreximbank facility will ease the pressures on the nostro account, but it is just a relief measure. RM: Do you foresee Zimbabwe sliding into the 2008 inflationary trap? What is your comment on this? CM: We might not necessarily slide into a hyper-inflationary trap, but we need to guard against it. The money changers have started causing havoc and the informal market players have been creating artificial shortages. All that must stop and this will assist in managing the inflationary threat. Last, but not least, fiscal spending also has to be managed as funding a fiscal deficit can lead to inflation.