Online Reporter
THE Reserve Bank of Zimbabwe’s tight monetary policy, backed by the Government through the Ministry of Finance, Economic Development and Investment Promotion, coupled with the Government’s continuing tight fiscal policy means that currency stability and low inflation are now seen as normal, with monthly inflation hitting zero last month.
This desirable state will remain normal because the fundamentals have been fixed and between them the Reserve Bank and the ministry have tracked down all the taps that were creating money intentionally and unintentionally and have shut them, just leaving the dripping that is justified to allow money supply to grow roughly in line with the rate of economic growth.
The April-to-May month-on-month inflation figures were especially important since the May prices in the data collection and calculations by ZimStat followed the deregulation of exchange rates by retailers in the second half of April, with the full effect of that deregulation being seen in the prices recorded in the second week of May. The ZiG monthly inflation rate rose from 0,6 percent in April to 0,9 percent last month, with that trivial 0,3 percent one-off rise being the direct result of the equally trivial rise in retail exchange rates in late April after the total liberalisation of the markets. But since the authorities had managed to get the fundamentals sorted out, there were no sudden jumps.
Generally retailers rounded off their exchange rate from the ZiG31 and some cents to the US dollar that was the legally permitted rate before the end of restrictions to ZiG32 on deregulation, which simplified change and calculations as they switched between currencies at the tills.
That trivial jump fully justified the authorities when making their deregulation decision with their confidence in the underlying value of the ZiG. They had a respectable currency, knew they had one and took the plunge, abandoning 60 years of exchange rates set by law.
The naysayers had predicted a huge surge in prices in such a changeover, the cancellation of the relevant set of regulations. But the result was hardly a big bang in the markets, more of a tiny pop that few actually heard or noticed.
The US dollar monthly inflation rate actually went negative, to -0,3 percent from the 0,5 percent of April but this appears to be part of the necessary correction of that sudden and still largely unexplained jump in US dollar prices of over 10 percent between December and January, a prices jump that was significantly higher than the jump in ZiG prices.
However that sudden spike in what had been a flattish line a little above zero on the graph did disabuse those who had been preaching that only a return to full dollarisation would fix inflation. What has fixed inflation is the creation of a proper currency and straight-forward hard work at the Reserve Bank and in Government.
The combined weighted monthly inflation rate using both currencies was calculated at precisely zero, showing that while the percentage of transactions in US dollars still form the majority the percentage is falling as the ZiG becomes ever more acceptable.
That January spike still keeps the year-on-year inflation rate at 13,95 but early next year, as it disappears from the dataset for annual inflation, we should finally see the single digit annual inflation that everyone wishes for, and single digit in both currencies as well as the weighted average.
Part of the reason for stability in exchange rates and inflation has been the growth in the monthly surpluses of foreign currency inflows over outflows, running at an average of more than US$300 a month between the beginning of last year and February this year, with an upward trend. Inflows are almost all export earnings and diaspora remittances combined, export earning entering the formal banking system either into nostro accounts or for trading, while diaspora remittances being the main source of the foreign cash swirling around the economy, although a lot of this going through many hands as it swirls around.
The diaspora money finally ends up at a service station, where these remittances eventually buy most of Zimbabwe’s largest single import, or at shop tills, where it reduces demands on the banks for foreign currency, or in the hands of cross-border traders where it provides one of the major foundations of the informal sector.
The Reserve Bank, like most central banks, does intervene in the formal banking sector selling or buying foreign currency but this sort of intervention, in contrast to the decreeing of exchange rates, is considered acceptable and useful in most countries and part of normal monetary policy.
The interventions of the Reserve Bank still include maintaining and growing the foreign currency reserves backing the ZiG. This is more than three times cover for the ZiG under the tightest definition of money supply, but perhaps more importantly more than 100 percent cover for every ZiG in existence when using the broadest possible measure. This determination to use the more old-fashioned broad measure as setting a minimum has paid dividends.
As a result of both the foreign currency monthly surplus and the strong reserve cover for the ZiG, the parallel market rate, what is set by groups of black-market dealers, has stabilised at a premium of around 20 percent. This largely reflects the “convenience store” function of the parallel market rather than anything fundamental.
The premium is now so low, or even non-existent when transaction charges and taxes are added in on the rate black-market dealers use when buying foreign currency, a significantly lower price than they charge when selling it, that hardly anyone bothers changing their foreign currency into ZiG at a pavement dealer before buying groceries. If they have foreign currency they use it at the till and if they have ZiG they buy for that currency.
Every month we continue getting better news of our new normality and this is starting to reflect in how people are adjusting and thinking, as the general acceptance of stability in prices and exchange rates takes hold.
Obviously prices will creep up over time, as very low inflation is a sign of maximum economic growth although anything that is very noticeable is undesirable.
Currencies do move against each other in the modern world, but again large jumps are not considered useful or necessary. Zimbabwe is now moving within these sort of parameters.
