Inflation to plunge 62pc
ANNUAL inflation is expected to gradually decline in the second half of this year and plunge 62 percent to 300 percent by the end of year in response to current monetary and fiscal policy interventions, Finance and Economic Development Minister Mthuli Ncube has said.
Zimbabwe started experiencing exponential increase in inflation in October 2018 after scrapping the US dollar dominated multi-currency system it had used since 2009 and reintroducing its own currency, amid growing shortage of the greenback.
The removal of the multi-currency system was consistent with planned macro-economic reforms under the transitional stabilisation programme to realign key fundamentals to place the economy on a sustainable growth path.
Presenting the 2020 mid-term budget review in Parliament yesterday, Minister Ncube said the projected annual inflation was consistent with reducing the month-onmonth inflation from 31,7 percent in June 2020 to around 5 percent in the last quarter.
Minister Ncube said inflationary pressures, which subsided in the last quarter of 2019 and in January 2020, resurged from February 2020 to reach 785,5 percent by May.
Monthly inflation, which had declined from 16,55 percent in December last year to 2,23 percent in January this year, rose to 26,59 percent in March, before receding to 15,13 percent in May.
Inflation refers to the rate of prices increases over a measured period, usually a year or month, but declining inflation only signifies reduced pace of prices hikes not necessarily a drop in prices of goods or services.
“The surge in annual inflation is attributed to speculative pricing, arising from forward pricing practice and adverse inflation expectations, following the depreciation of the Zimbabwe dollar against major currencies in the parallel market,” he said.
The Treasury chief said amid exchange rate volatility retailers had started benchmarking their prices to parallel rates prior to the introduction of the auction system, which they are now correcting in line with the advent of the foreign currency auction determined exchange rate.
Prof Ncube said exchange rate levels and movements have far-reaching implications for inflation, exports competitiveness, efficiency in resource allocation, international confidence and the country’s balance of payments equilibrium.
“Therefore, exchange rate developments are a matter of national interest and concern to Government, the business community and the general public,” he said.
To stabilise the exchange rate and anchor inflation, the Government introduced the foreign exchange Dutch Auction system on June, 23, 2020, which is designed to reduce exchange rate instability.
The auction system, which replaced the interbank and temporary fixed rate regime, is expected to enhance transparency in the management of foreign exchange, achieve a realistic exchange rate for the Zimbabwe dollar and discourage speculative demand for forex.
“It is important to note that the country’s foreign exchange position is quite ideal for an auction system. As at 31 May 2020, total foreign currency inflows (into Zimbabwe) amounted US$2,35 billion, against foreign payments amounting to US$1,55 billion,” Minister Ncube said.
The weighted exchange rate of the inaugural auction system was $57,35 to US$1. The total bids received amounted to US$11,41 million and US$10,35 million (91 percent) was allotted.
The second auction held on June 30, 2020, saw total value of bids increasing to US$18,9 million, of which US$16,3 million was allotted. The bids ranged from a minimum bid rate of $37,82 to the US dollar to a maximum of $92 to the US dollar.
The third auction held on July 7, 2020 saw 264 bids being submitted. Two entities bid at $90 to the US dollar while the bulk of the bids (more than 50 percent) were between $60 and $70 to US$1, giving a weighted average rate of 65,88.