Douse inflation promptly lest it will raze economy to the ground
INFLATION, at unwieldy high levels, promptly degenerates, through a somewhat viral mutation, into a terrible and brutal economic and psycho-social monster which petrifies lots of Treasury chiefs across the globe.
Often, many a Treasury chief the world over takes to behaving like a cat on hot bricks whenever inflation starts to show signs of its unwelcome visit. Untamed, inflation can callously decimate consumers’ buying power, savings and pensions.
Inflation induces price instability. Planning is rendered knotty in an environment with high levels of inflation. In simple terms, purchasing power is depleted ever so readily wherever inflation rears its ugly head. No wonder inflation induces ineluctable panic in economic agents.
Once economic agents are in panic mode, planning becomes quite a mammoth task even for seasoned and astute strategists.
Often, consequently, observers are treated to world-class knee-jerk reactions from economic agents whenever inflation decides to make its bed, thereby threatening to indulge itself in a protracted, albeit unwelcome, slumber on price pillars of an economy.
Reactions by economic agents to inflation appear to be steeped in rational fear. Generally, human beings appear to act rationally.
Humans have an innate knack and inherent mechanism that triggers prompt reactions to significant negative stimuli whether such undesirable provocations are internally or externally felt.
Upon being confronted with anything that threatens their existential comforts, humans tend to react whether proportionately or disproportionately to the magnitude of the threat. Inflation is one such threat that elicits such reactions.
The manner of reaction from Treasury chiefs and the rest of economic agents to inflation’s first raps on the economic door is the proverbial key that either unlocks higher levels of inflation or clears the path to curtailing it.
Inflation can be likened to wildfire. If a person catches fire, to douse it, one would need something that is able to deprive the fire of oxygen, for example pure water.
If one were to pour paraffin or most of the derivative products of petroleum simply because they normally exist in clear liquid form as does pure water, the burning person would be lucky to survive to tell their tale of misfortune to others later.
Such is the nature of inflation. If badly handled, it can figuratively burn economies to ashes; if inappropriate or ineffective strategies or methods or approaches are employed to extinguish it, an economy would be difficult to revive after being burnt by inflation.
Zimbabwe adopted a basket of multi-currencies as legal tender in 2009, that was after the country’s own currency had been protractedly knocked off balance and decimated by hyperinflation.
Had it been a boxing contest between inflation and the Zimbabwean currency, the latter could aptly have been described as having been handed a technical knockout punch by inflation.
Policymakers, prior to dollarisation, were incessantly working, ingenuously infused with copious doses of good intentions, to ensure economic agents continued to avail themselves of physical currency units for transactional purposes through a raft of measures including, but not limited to, printing of higher denomination currency units that were meant to track the ever-rising price levels.
Gradually, economic agents started refusing to accept local currency for settlement of debt, preferring what they perceived to be stable foreign currencies. Wholesale dollarisation had thus commenced on the main streets and byways of the country.
When the Zimbabwean government finally made an official pronouncement that the country had officially dollarised, the upward price spiral was finally en route to being stemmed.
For a short while though, some business players, impelled by nostalgic yearnings for unjustifiable and unsustainable windfall gains which had been precipitated hitherto courtesy of unsavoury yesteryear business practices, attempted to perpetuate the high frequency price hiking approach.
Business players that did that soon learnt, the hard way, how noxious to their own businesses such practices had suddenly turned out to be.
In the pre-dollarisation epoch, access to foreign currency had largely been a preserve of a relatively few individuals and corporates whereas post-dollarisation, foreign currency became apparently ubiquitous as the sole legal tender.
Prosper Munyedza is an economist, training facilitator and management consultant. He is a Chevener who holds a Master of Science in Business Analysis and Finance degree with the University of Leicester and a Bachelor of Science in Economics Honours degree with the University of Zimbabwe, among other qualifications. He writes here in his personal capacity.