Forex rate disparity pressures remain a threat to price stability

THE foreign exchange rate disparity between the formal and alternative markets remains a key negative externality, propelling continued cycles of inflationary pressures and driving price increases in both US dollar and Zimbabwe dollar (Zimdollar) terms.

Analysts agree that the issue of price stability is an ongoing problem that cannot be resolved through economic policy alone but rather through building confidence in the foreign exchange system.

The month of January 2024 witnessed price increases for basic goods and services in both USD and ZWL terms. The latest figures from ZimStat also show that the month-on-month inflation rate rose to 6,6 percent in January from 4,7 percent in December 2023.

Analysts who spoke to Business Weekly said the Government’s new taxes and reviews are also weighing on prices.

“The foreign exchange rate disparity between the formal and alternative markets remains a key negative externality propelling continued cycles of inflationary pressures in the local currency, baring the picture being postulated by blended inflation numbers.

“Upward tax revision in certain economic markets is also weighing on galloping price increases given the interdependence of value chains in the economy,” said investment analyst Enock Rukarwa.

He said the operating environment remains complex and uncertain; however, key themes for corporations should remain balance sheet hedging, optimal resource allocation and cost minimisation.

Most of the new taxes took effect at the start of the year, and prices are estimated to have gone up by 30 percent.

However, businesses pass on these costs to consumers whose disposable incomes are already at the mercy of exchange rate volatility.

Economist, Victor Bhoroma, said the taxes and changes brought in the budget are the main cause of the price changes.

“Just in as much as the reinstatement of duty on basic foodstuffs. However, money supply growth has continued to quasi fiscal operations, which continues to put more pressure on the limited foreign currency in the formal market,” he said.

Bhoroma also said all business players adjust their pricing according to input costs and cost of doing business in the market, unfortunately, the Zimbabwean environment is very hostile.

“Most of the companies would need to adopt strategies that will be able to save most of the foreign currency they have while at the same time continue to engage government policy wise on what need to be done in terms of aligning the formal exchange rate and the parallel market exchange rate.

“Otherwise it is largely an issue of containing the costs that are related to the business while at the same time being able to satisfy largely diverse dual economy, but most of the companies have been resilient in the Zimbabwean economy,” he said.

Economist, Vince Musewe, said inflation drivers in Zimbabwe are mainly due to migration to the USD and a lack of confidence in the ZWL.

“This is caused by multiple issues, including politics. You cannot create confidence in any economy without political stability and trust in the government that it will do what is best for citizens.

“A holistic approach to addressing price instability includes political stability; hence, as long as questions remain on the political front, we cannot have a stable economy,” he said.

He added that without confidence, there is no economic stability, and businesses cannot invest for the long term, which stifles economic growth potential.

In its January food security report, the Famine Early Warning Systems Network (Fews Net) said that in January, the Zimdollar devalued by around 50 percent on the official and parallel markets, resulting in significant increases in basic food and other commodity prices.

“Above-normal US$ price increases, over 30 percent for some commodities, have also been recorded, partly in response to additional tax measures and increasing production and transportation costs,” it said.

Fews Net said the Zimdollar cost of living rose by around 45 percent last month and by about 595 percent compared to January 2023.