Source: Massaging inflation data won’t revive Zim economy – DailyNews Live
2 October 2017
HARARE – Prior to December 1991 when the Soviet Union ceased to a
communist empire, its flagship broadsheet newspaper was called Pravda, or
“Truth.”
But everyone knew it wheeled out fibs.
The credibility of Pravda was so small that those who bothered to peruse
it would believe unerringly the opposite of what it tried to report.
Zimbabwe must have learned many lessons from the collapse of the Soviet
Union.
But it seems Zimbabwe’s National Statistics Agency (Zimstat) has learned
nothing about the futility of massaging economic performance. While
official inflation figures released by the State organ Zimstat show a
stable year-on-year outturn in August, experts have said consumer price
inflation has in fact sharply escalated.
Officially, annual inflation came in at 0,14 percent, which is unchanged
from the prior month.
But at least two economics and financial markets authorities – one local,
another international – have rubbished Zimstat’s claims.
Leading Zimbabwean financial research firm Equity Axis said despite the
stable out-turn, which factors only the formal markets component,
inflation is widely believed to have spiked by a huge margin.
Steve H. Hanke, an American applied economist, said Zimbabwe’s annual
inflation rate has soared to 242,72 percent, the second highest in the
world after Venezuela. I will come back to this later.
Let’s start with Equity Axis.
Looked at inversely, the research firm says purchasing power of the
consumer has eroded drastically due to the obtaining discounts prevalent
in the market.
Retailers and suppliers of a broad set of products are differentiating
prices according to modes of payment, what is being termed the
three-pricing system.
Retailers have begun to charge customers three different prices for goods
and services depending on the brand of dollar being used: a paper US
dollar price, another in “plastic money” or local US dollar-denominated
bank deposits transferable by debit or swipe cards, and the last price in
terms of the parallel paper money called bond notes.
JP Koning, a leading Canadian economist, has said the three-tier pricing
is actually the market’s natural response to a breakdown in the
fungibility, or substitutability, of various types of money.
As for bond notes, they were supposed to be pegged 1:1 by equivalent
United States dollars held in accounts at an international development
bank, the Africa Export Import Bank.
But this promise has proven to be a dubious one as the peg has not held.
This panoply of prices is quite embarrassing to President Robert Mugabe
and his cronies as it makes the government look weak. They are trying to
put an end to three-tier pricing by forcing retailers to set one universal
price for goods using force of diktat.
The penalty for not accepting cash and plastic money at par is up to seven
years in jail. Now back to Hanke, he says he estimated Zimbabwe’s present
inflation by reviving a gauge used during the hyperinflation era – the Old
Mutual Implied Rate.
This compares share prices of the Old Mutual insurance firm in Harare and
in London, where it has its primary listing. Harare shares are trading at
a sizeable premium.
The only difference between Old Mutual shares traded on different
exchanges is that the shares traded in London are denominated in British
pounds sterling; whereas, those traded in Harare are denominated in
Zimbabwe dollars.
Therefore, says Hanke, if price arbitrage works and Purchasing Power
Parity (PPP) holds, the ratio of the Old Mutual share price in Harare to
that in London equals the Zimbabwe dollar/sterling exchange rate.
This exchange rate can be transformed using PPP to accurately measure
Zimbabwe’s inflation. As of September 29, 2017, Hanke says Zimbabwe’s
annual inflation rate has soared to 242,72 percent, not the 0,14 percent
being punted by authorities.
Judging from the content of Zimstat’s stagnant figures, it is clear
authorities are not reporting honestly on inflation and actually invented
a more optimistic message.
What government seems not to understand is that current pessimism about
the economy has less to do with the recent spate of bad news than with the
policy inconsistency, lack of reliable data on the economy and the opacity
of Harare’s process of economic policy-making and its intentions.
Exhibit A is Zimstat’s Pravda-like version of inflation data. This is an
example of an ill-advised attempt to prop up a crashing currency.
COMMENTS