Inflation stats: Bearing on 2022 fiscal year

THE December month-onmonth inflation came in at 5,76%, maintaining the

November outturn, versus a

6,4% October turnout. The negative variance shows a runaway position, outside the RBZ’s targeted level of 5%. Year-on-year inflation registered a marginal increase to 60,74% against the November figure which stood at 58,40%.

Annual inflation has been on a rise over the four past consecutive months. Of note, inflation peaked in July of 2020 at 830%, before climbing down in successive months up to July 2021. Granular analysis of the CPI data shows that the increases recorded in November were predominantly driven by the hospitality sector, a seasonal spike. Other baskets include food and alcohol, as well communications, in line with tariff reviews.

Government initially anticipated an annual inflation outturn of below 35% by year end. In its most recent Monetary Policy Statement, the RBZ said it was now targeting a revised inflation outturn of between 35% and 54% by year end, up from the initial 10% forecast. The recent 2022 Budget forecasted a 58% upper range projection by year end with a recent Monetary Policy Committee resolution expecting a max of 60% at year end. All of these targets were missed!

Forex auction

On the forex auction market, the Zim dollar marginally appreciated against the greenback for a third time this quarter with the local unit gaining 0,002% against the American dollar at the close of the most recent auction trading week. Year to date, the ZW$ has depreciated by over 30% on the formal market with most of the losses incurred over the last three months between October and December. Equity Axis, a leading financial research firm views the recent depreciation on the formal market as a deliberate move by authorities.

The black-market rate, which is currently sailing north of 230, is trading at premiums of over 90% to the formal market. It goes without saying the market is not as efficient and has been subjected to the central bank’s tight leash, controlling the supply side of the market. The instability of the local currency has an overhanging effect on the inflation matrix as pricing by local firms is heavily premised on the greenback.

Reserve money

Preliminary RBZ estimates indicate Zimbabwe’s Reserve Money (RM) grew 16,5% in the last quarter of 2021 rising from ZW$24,36 billion (US$251 million) in October to ZW$28,38 billion (US$263 million) as at December 17, 2021. Year-to-date, base money has scaled-up approximately 51,3% having ended 2020 at ZW$8,76 billion (US$230 million). Notably, Zimbabwe’s liquidity growth continues to outpace that of domestic production, a trend likely to fuel inflation acceleration in the months that lie ahead.

2022 budget

Assuming a stable exchange of about 1:190, the 2022 budget was US$4,8 billion, versus a dollarisation average of US$3,8 billion — a better off position. Between 2014 and 2018, budget deficits began to widen as far as 40%, which meant spend could top US$8 billion in some instances, such as in 2018.

In 2021 alone the currency lost over 30% on the formal market and close to 80% on the informal market. This means that ZW$ values set at the beginning of the year were now grossly eroded; 30% and 80% on the formal and informal markets respectively.

Assuming this trend is carried over to 2022, the budget carries a risk of erosion of at least 50%, which means a budget position of US$4,8 billion in present terms will be trimmed by almost half by the end of the year. In essence, the budget levels for the coming year are at par with post dollarisation years where it averaged about US$2,5 billion.

A lasting solution to the currency conundrum is the right antidote!

This article was written in collaboration with Rugare Mukanganga