Ncube’s inflation hypocrisy baffling

Source: Ncube’s inflation hypocrisy baffling – The Zimbabwe Independent December 13, 2019

The Brett Chulu

Finance minister Mthuli Ncube cannot sustain the argument that the reason for banning the publication of year-over-year inflation based on the Consumer Price Index (CPI).

In the 2020 budget statement, on Page 54, Ncube gave us forecasts and projections for real GDP. Real GDP measures the monetary output of the economy based purely on volume changes. Real GDP tells us whether an economy is growing or shrinking. Inflation and GDP are politically sensitive numbers.

In coming up with the real GDP forecasts and projections Ncube could not escape employing some kind of year-over-year inflation without the necessary 2019 year-over-year figures — it is methodologically impossible, unless creativity in figures is what was happening. I will be upfront; my analysis of official inflation data shows that Ncube is secretly using hard year-over-year inflation figures that he is denying others. This raises a lot of questions on critical economic forecasts and projections such as GDP growth Ncube has made.

To make the submissions in this article more accessible to a wider audience, an explanation of a few more concepts is necessary.Nominal GDP measures the output of the economy based on price changes. The relationship between real GDP and nominal GDP is called a GDP deflator. More precisely, the GDP deflator is the ratio of nominal GDP to real GDP. The GDP deflator is a price index.

The major difference between the CPI and the GDP deflator is that whereas the CPI measures the price changes of a fixed basket of goods and services relevant to consumers, the GDP deflator measures the change of prices of all goods and services produced domestically.

Granulating the differences further, the CPI measures the price changes of both locally produced goods as well as imported goods while the GDP deflator measures price changes for locally produced good only. Whereas the CPI is based on a fixed basket, the GDP deflator is based on a changing “basket”.Technically, the CPI is a Laspyere index and the GDP deflator is a Paasche index.

We are now ready to delve into the arguments. My reading of the 2020 budget statement shows that the following GDP deflators (Paasche price index) were applied: 707,76 for 2019 (this year), 1 779,29 for 2020 (next year), 2 176,84 for 2021 and 2 235,65 for 2022. Ncube did not state the base year for the GDP calculations. The IMF recently revealed that our GDP base year is 2009.

Holding this to be the case, it means that prices of locally produced goods are seen to have increased 7,07 times since February 2009(multi-currencies adoption) and to have increased 17,79 times from February 2009 by the end of next year.

These price indices imply a year-over-year Paasche inflation rate of 215% for 2019, 152% for 2020, 22% for 2021 and 3% for 2022. These projections tells us that Ncube sees inflation of locally produced goods improving dramatically as we approach the next elections, with a very low and stable inflation on the eve of the 2023 elections.

This can explain why the political elite feel confident of being re-elected as they surmise that once year-over-year inflation drops to a single digit well before the elections, the suffering masses will soon forget the hardships they went through and renew their adoration of the ruling elite.

Of greater concern on my part is that if I compare the implied inflation rate for 2019 based on the GDP deflator and the forecasted CPI average, the two are practically the same. Ncube may have banned year-on-year inflation publication, but by publishing month-on-month inflation figures, it has been possible to work the CPI accurately and using the CPI accurately calculate the year-over-year inflation he is hiding from the public.

One must hasten to emphasise that the CPI is not the year-over-year inflation – one uses CPIs to calculate the actual inflation. Here are the results of my calculations for year-on-year inflation based on deciphering the banned CPIs; 230,6% for July, 288,5% for August, 352,9% for September and 440,0% for October. Ncube recently revealed that he projects that month-on-month inflation dropping to single digits towards the end of this year. A fall in inflation does not mean a fall in prices — it means prices are rising but much slower.

If we apply Ncube’s assumptions and input them into the inflation calculation model, the year-over-year inflation for 2019 is expected to range between 217% and 227%. The lower bound of this range would be just 2 percentage points ahead of the inflation implied by the GDP deflator.

We can now ask the questions. The first one is: seeing the possibility that the average inflation based on the CPI and the GDP deflator could be the same, could we be simply using the CPI to deflate our nominal GDP to estimate our real GDP? That would be scandalous.

I hope that is not what we are doing because if it were so then our real GDP decline for this year (2019) would be more than 10%. It should be noted that Ncube’s projected real GDP growth of 3,01% and 3,26% for 2020 and 2021 respectively will still fail to increase real GDP to 2018 levels.

I would like to give our statisticians the benefit of the doubt that the forecasts and projections of real GDP are based on a solid model that measures the actual prices and volumes of goods and services in the entire economy.

The second question is: why are we having implied GDP deflators that by definition need year-over-year inflation data, which data should not be available as per the year-over-year inflation ban? Why are our fiscal authorities feeding from the data that they themselves have declared unfit? Why the hypocrisy?
It is asking us too much to trust the figures on real GDP in the budget given that censured data is apparently involved.

It is baffling that Ncube quoted real and nominal GDP figures for 2018 in Zimbabwe dollars. This means an exchange rate was used to convert the GDP which was denominated in USD since we still had the 1:1 parity in 2018.

A rebased GDP of US$25 745 was officially quoted in fiscal documents, giving us a implied ZW$:US$ exchange rate of 1,72. The question is: where did they get that exchange rate since we had a 1:1 parity? The fiscal authorities had to use 2018 figures in order to arrive at the implied GDP deflator for 2019.

Therefore, Ncube’s argument that the reason for suspending year-over-year inflation figures is that like-for-like comparisons will only be possible next year is not valid since he has reached out for year-on-year data before his like-for-like pre-condition is met.

If the hypocrisy is a product of political pressure to shield data from the public that could potentially set the alarm bell of an economy in free fall, it cannot hide from facts borne by science — the footprints of inflation performance cannot be hidden. It is a big indictment on post-Mugabe economic management that prices of consumer goods and services before the non-coup coup remained significantly lower than those of February 2009, with the year 2017 recording a CPI of 67,6. This means that in 2017, the year of the non-coup coup, prices were 32,4% lower than in February 2009.

Today, the CPI is sitting at 402,8; general prices have climbed 5,95 times since the removal of Mugabe, but salaries have remained largely flat. If month-on-month inflation keeps raging at the October pace, prices will have climbed 12,69 times since the fall of Mugabe. What a report card!

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.