Price increases hamper govt inflation targeting

Source: Price increases hamper govt inflation targeting – The Zimbabwe Independent April 5, 2019

Kudzai Kuwaza

SHARP increases in prices of basic commodities and the recent rise in the price of fuel will further stoke inflation, and the trend flies in the face of government projections that prices will slow down by the end of the year.

Prices of goods such as flour, sugar, cooking oil and washing powder have skyrocketed. Flour has gone up to $7,35 from around $4. The price of two litres of cooking oil has shot up from just under $10 to around $13. The price of 2kg sugar has shot up from just under $4 to $5,29, while a 500-gramme pack of washing powder has shot up from around $3 to around $6,55.

This comes as the Zimbabwe Energy Regulatory Authority announced an increase in the price of fuel effective on Monday next week. This could trigger further price increases, raising the level of inflation.

This has cast serious doubt on government’s proposed target of reducing year-on-year inflation to single-digit figures by the end of the year. The Reserve Bank of Zimbabwe has projected that inflation will fall to between 10 and 15% by year-end.

Inflation has increased significantly since October last year, shooting up to 59,39 % in February, from just over 40% in December last year — the highest since 2009.
Consumer Council of Zimbabwe director Rosemary Siyachitema said the consumer rights watchdog has conducted a study on price increases since October last year, with the results expected soon.

She said the increase in prices is a result of a number of factors, which include the shortage of foreign currency, the increase in the salaries of civil servants, and profiteering.

Economist and CEO Africa Roundtable chairman Oswell Binha said as long as the authorities do not address the foreign currency shortage in the market, government will not be able to tame inflation.

“When government says inflation is going to be reduced by the end of the year, are they going to pump foreign currency into the market? As long as banks do not have foreign currency for industry to meet the cost of raw materials and spares then government’s aim to reduce inflation will remain a pipedream,” Binha said.

“There are two things here. It is one thing to announce something, it is quite another to do something. Inflation is a result of price increases and price increases are a result of demand and supply.”

He said the government should abandon its policy of forcing account holders to use their forex within a period of 30 days as it only brings about uncertainty and defeats their efforts to contain inflation.

“How can you tell a company with an investment outlay of three years to spend their foreign currency within 30 days? It does not make sense,” Binha said.

Economist Godfrey Kanyenze said the price increases, among other pressures, make it difficult to attain the government’s inflation targets.

“The minister (of Finance Mthuli Ncube) has said it will not be plain sailing. Price increases and complications brought about by the El Niño-induced drought and the destruction brought about by Cyclone Idai in the eastern part of Zimbabwe will result in unbudgeted expenditure,” Kanyenze said.

“When you add the weakening exchange rate, it will be very difficult to reduce inflation. It is an elusive target.”
Kanyenze said that achieving the target to reduce inflation will mean that government will need to increase austerity measures, which could result in a pushback from civil
servants and the general public.

“There is very little room for government to manoeuvre,” Kanyenze noted.