MPC could explain more over inflation

BUSINESSWEEKLY

THE resolutions of the latest monthly meeting of the Monetary Policy Committee of the Reserve Bank of Zimbabwe highlight some of the peculiarities of the Zimbabwean economy at the working level of individuals and businesses.

The blended inflation rate remains very low, at 0,1 percent for the month up to around the middle of March, following the 0,7 percent in January and the -1,6 percent in February, but while that gives a lot of information for the national economy it is a lot less useful for many people and many businesses.

The blend assumes transactions in Zimbabwe are 70 percent in US dollars or other foreign currencies and 30 percent in local currency, with that blend being the case since at least the beginning of the year.

We can assume the blend had a higher percentage of local currency as we move into last year, and a much higher percentage before the interbank rate started setting a realistic official exchange rate and the policies that tamed and then curbed the black market in currency dealing took effect, and hammered back the premium to something within acceptable levels of 20 percent or less.

When the black market had a large premium, there would have been a far higher percentage of local currency transactions as many of those with foreign currency would try as far as possible to convert at the black-market rate and then use the resulting local currency to do their transactions. This would not always be possible. Almost all fuel transactions, for example, have to be in foreign currency.

One noticeable result of the severe taming of the black market and the lowering of the premiums over the official interbank rate has been the rise in people using foreign currency at the retail and wholesale level directly for non-petroleum purchases.

This can even be quantified to an extent by looking at the weekly foreign currency auctions, which are now selling around US$20 million a week, around half what they were selling at their peak. Some of the fall arises from the growth in the interbank market which moves a batch of currency purchases from the auctions, and some arises from the falling demand for currency to import agricultural raw materials such as grain, oil seed and even dairy.

But even with those buyers reducing demand in the auctions, we obviously have more businesses within Zimbabwe and without much, if anything, in the way of exports now earning their own foreign currency and able to retain 85 percent of it for their own imports and foreign currency payments.

That said it would be useful to find out how the 70:30 transaction ratio in favour of US dollar payments is calculated or discovered.

The monthly MPC report did give one interesting piece of information, that in the five months between October last year and February this year, the RTGS system which handles most of the transfers between bank accounts saw Z$10,6 trillion in total transactions compared to US$7,5 billion.

October was a sensible month to start looking at the figures since that was after the black market was curbed and the start of the direct foreign currency payments being used for many transactions in Zimbabwe.

However, those RTGS figures, when you feed in a median exchange rate over the five months, say 750:1 to 800:1, actually give something a lot closer to 60 to 65 percent local currency in the transaction mix using RTGS bank transfers.

That in turn implies, to get the 70:30 ratio in favour of US dollars, that a lot of transactions, at least in foreign currency, are not going through the banking system.

The authorities have ways of finding out what the actual percentages could be. For a start businesses that pay VAT are compelled to pay in the currency they collect that tax, that is they pay in US dollars when the customer pays in US dollars and they pay in local currency when the customer pays in local currency.

To that can be added the petroleum trading and selling, an industry that does not pay VAT but which does pay other taxes. The authorities in any case know how much of each type of fuel is imported, they know the stipulated maximum wholesale and retail prices and so can easily work out how much foreign currency goes into petroleum trading each month, since there is little or nothing in local currency.

Adding those together should start coming nearer to the 70:30 ratio of the authorities. But it also implies a very large chunk of the US dollar transactions are paid in cash, that is by debit cards outside the RTGS system or by actual US banknotes. The sort of loot that armed robbers frequently snatch seems to back this high volume of banknote transactions, and at some stage Zimbabwe needs to reconnect holders of foreign currency with the banking system.

Getting the percentages roughly close, and 70:30 is clearly a very round number rather than something accurate to even one part in 100, is important when the ratio is given to ZimStat to work out the blended movements in the cost of living index.

ZimStat collects the raw data each month with its flood of workers going into supermarkets and shops and find the actual prices in both currencies for the large range of items that make up the index.

They then feed these into the formulas to get the US dollar and local dollar indexes. Then they need the blending ratio, which must come via the parent Ministry of Finance and Economic Development to derive the monthly and annual inflation rates. Even if the ratio if five percent out the final result will not be severely affected so long as local currency inflation is low.

The two single rates of inflation are not made public, which is a pity. But from the negative February blended rate and the almost zero March blended rate we can assume that US dollar prices are actually falling, since Zimbabwe at present has monthly inflation rates below the US inflation rate.

That does make sense. Some US dollar prices were pushed up during high local inflation to get round the law that allows consumers to choose the currency they pay in. This was done to produce a local price that while calculated at the official rate was actually a back calculation from the black market rate pushing up the US dollar price. The fact that US dollar prices must now be falling is the result of first the greater use of direct US dollar payments and the lowish local inflation rate.

The attitude of the authorities, stopping ZimStat from issuing all three inflation rates, the blended, US dollar and local currency, is understandable considering the way so many who never touch local currency worship the annual local currency inflation rate. But it does create problems for those who are largely paid in local currency and are seeking pay increases to keep their heads above water.

The next five months will see dramatic falls in annual inflation rates as that spike in monthly inflation in the corresponding months of last year, and the spike is there for both the blended and the local currency rates, is removed from the sums for the annual rate.

We have many times pointed out that quite often the annual inflation rate in Zimbabwe, where there has been a surge in inflation for a few months followed by a collapse to low monthly rates, provides hardly any useful information and does not measure what is happening at any particular time in the economy. But many do not think like that.

However, once that five-month spike is removed, the opportunities exist for the authorities to start giving us the triple set of calculations of monthly and annual inflation so that individual people and individual businesses can start doing their own blends according to the actual percentages they use of each currency, rather than having to second guess their own financial state from the average blended rate.