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RBZ's double-digit inflation target elusive
Shakeman Mugari, The Zimbabwe Independent
February 25, 2005

http://www.theindependent.co.zw/news/2005/February/Friday25/1743.html

THE upswing in the January inflation figure is an early warning that the Reserve Bank might fail to achieve its double-digit inflation figure by year-end, analysts have said.

The analysts say there has been a resurgence in the inflationary pressures, caused by government’s salary hikes and price increases by state enterprises.

They also say recent moves to dole out $10 trillion to state companies under the Parastatal and Local Authorities Reorientation Programme (Plarp) is highly inflationary. Economists believe it would be very difficult to raise the money from the market and government will have to print more money to fund that expenditure.

The analysts say it is going to be increasingly difficult for the RBZ to meet its double-digit inflation figures because the macro-economic environment is still largely unstable.

The Central Statistical Office (CSO) figures show that month-on-month inflation increased by 10,2 percentage points to 14,1% in January, up from 3,9% in December last year. The CSO said non-food at 91,8 percentage points, provided the major push, while food weighed in with 41,7 percentage points.

Prices of basic commodities have continued to skyrocket as manufacturers pass on the costs to consumers to maintain their waning margins.

Year-on-year inflation went up 0,9% to 133,6% from 132,7%. This means that prices of commodities are now going up at a faster rate than last year.

Analysts believe it is going to be more difficult to drag inflation further down as it approaches the 100% mark. Inflation has been on the slide since a January peak of 623% last year, shedding 490%.

Experts believe it could be the beginning of worse things to come. They say government expenditure is currently the biggest inflation driver. Government last month awarded salary increases of between 200% and 600% to civil servants. Its wage bill gobbles more than 35% of the budget.

Zimbabwe National Chamber of Commerce president Luxon Zembe said government was the main drag in the anti-inflation campaign.

"They are the major culprits. The January salary increases of 200-600% have set the tone for across-the-board wage hikes," Zembe said.

"By that action government is showing that it does not believe its own inflation figures."

Parastatals have also been allowed to hike their tariffs. Net*One and Tel*One have increased their tariffs, pushing up operational costs for companies.

The Zimbabwe Electricity Supply Authority (Zesa) is sitting on an energy price review that might push the rate by more than 60%.

Although their latest 120% hike proposal was stopped by the central bank, the power utility last year alone increased power prices by more than 700%.

"That has triggered price increases in products and services," Zembe said.

The two-digit inflation target could also come under pressure when the local authorities review their rates. The Harare City Council, for instance, plans to increase its water and service charges by an average 400%. It is currently sitting on a $1,4 trillion budget, which is likely to see charges go up by a minimum 300%.

Pressure continues to mount on manufacturers and service providers who last month alone were hit by rental increases of between 500% and 1 000%. They are also likely to pass the costs to customers whose earnings are already under severe pressure.

However, it is the $10 trillion doled out to local authorities and state companies that will trigger massive inflation increases.

Analysts believe the $10 trillion splashed under Plarp will worsen the deficit and be financed through money printing.

This would increase money supply and provide a fillip for the inflation rate. Growth in money supply increases inflation.

This week the Reserve Bank announced that it had issued a $500 billion Plarp bond to finance parastatals and local authorities turnaround projects.

"They will have to print more money to fund their budget deficit which is worsened by the $10 trillion handout," said economist John Robertson.

He said there was no way the government could raise such funds from the market because the country’s savings had run dry because of negative interest rates.

Apart from these handouts to ailing parastatals, the pending food shortages this year are likely to put further pressure on inflation.

Statistics show that Zimbabwe could have one of the worst farming seasons

ever. Agricultural experts say only 28 000 tonnes of maize seed have been planted compared to the required 100 000 tonnes.

The country has managed to produce 33 500 tonnes of compound D fertiliser instead of the required 300 000 tonnes. Currently, there is a serious shortage of ammonium nitrate fertiliser.

Only 900 000 hectares is under crop compared to an ambitious target of four million hectares. All this points to a serious food shortage this year. When that happens food prices would surge and result in higher inflation.

"It means we would need to import food. And that normally leads to imported inflation," Robertson said.

Reserve Bank of Zimbabwe governor Gideon Gono is adamant that his revised inflation target of 20-30% by December is achievable.

However, last week he attacked service providers and manufacturers for not being committed to the fight against inflation. He has also called on workers to exercise restraint in their salary demands.

But the odds are still staked against his targets. The Zimbabwe Congress of Trade Unions (ZCTU) is demanding a minimum wage of $2 million to match the food basket price, which has increased to slightly more than $1,8 million.

A family of six now requires just under $2 million a month for basic supplies.

"We will not be guided by Gono’s hogwash when we start salary negotiations. He was not being realistic. He was waffling," said ZCTU president Lovemore Matombo.

Political experts believe government expenditure will also gallop in the election period, worsening the deficit. Although it is difficult to put a value to the figure, past experience has shown that government normally raids treasury to finance its election campaign.

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