Is Mthuli’s Inflation forecast of 300% by December 2020 achievable?

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By Dr Tapiwa Mashakada

In his Mid-Term Budget review, Professor Mthuli Ncube claimed that, by Dec 2020, inflation will drop to 300 percent from its present rate of 750 percent. Is this wishful thinking? And why is the Minister pre-occupied with metrics every time? The answer is simple. Under Stabilization, the IMF and World Bank assess and monitor economic performance using the macro-economic dashboard. On this dashboard there are indicators like inflation, GDP, Deficit, Interest Rates, Trade Balance, Exchange Rate and so on.
Mthuli wants to impress the IMF and World Bank that stabilization is working. In my last instalment, I proved that he rigged the books to achieve a fictitous budget surplus. With Inflation, this manipulation is impossible. Inflation is difficult to control. Once a gvt can control inflation, its woes will be over. Inflation control is the main objective of Monetary Policy. So does that mean Inflation is a monetary phenomenon? Far from it. It is both a fiscal, monetary and structural issue. To this extent, Inflation is difficult to fight. Yet Inflation is toxic to the economic and social fabric. It erodes fixed incomes, in particular pensions. Inflation is a regressive tax that distributes wealth from the poor to the rich. Inflation overvalues the domestic currency and makes imports expensive while it makes exports cheap. This later effect has the potential effect of creating a trade deficit. Inflation creates stranded financial assets because domestic investors move away from money markets to the property market so as to hedge against inflation. Inflation is self-reinforcing as it creates speculation and builds further inflationary pressures. For these reasons, inflation control is elusive.
During the 2009-2013 GNU, we erased inflation by the stroke of the pen. Dollarization did the work for us. We did not address the structural bottlenecks in the economy which had precipitated hyperinflation. These structural factors are: (a) declining productivity; (b) parallel market exchange rates; (c) debauched mono-currency; (d) the budget deficit and (e) profiteering. We only dealt with the mischief of a debauched currency.
Dollarization is a quick fix. That is the reason why Economists are recommending dollarization as a panacea to fix the inflation scourge in the short term. But in order for that to be sustainable, economic stimulus measures must be put in place in order to ratchet up domestic production which is a key fundamental in the determination of price levels.
The other problem is a measurement problem. How is inflation measured. There is the consumer price index, the laaschpayer index (excuse my spelling, I last wrote this word in my first year Economics degree in 1988), the producer price index and so on and so forth. Now in Zimbabwe we use the discredited Consumer Price Index (CPI) which is based on a weighted average of a basket of expenditure on basic goods and services using the official exchange rate. This is a fiction in Zimbabwe. Because of the economic hardships, expenditure patterns are distorted. For example instead of buying bread, a household will but its substitute – sweet potatoes, which are not part of the consumer basket. There are other expenditures which change due to physiological and health reasons. For example a household participating in the sample will drop sugar from its expenses. Or an observed family will not pay school fees due to lack of income or fail to pay rentals. This distorts the measured expendirure. These days a family can buy goods using both ZWL and USD. This raises comparability issues. The producer index is much better.
Currently, the official year on year Inflation figure is 750 percent. Given the the rate at which prices are changing everyday, I do not see Inflation dropping to 300 percent in 3 months time.
So what is the basis of Mthuli’s thumbsucking? Clearly, it is the Auction system. Mthuli is bouyed by the seemingly convergence of the official and parallel market rates. Yet this is not convergence. The official exchange rate is simply catching up fast with the parallel market rate. In just one month, the auction determined exchange rate jumped from 1: 25 to 1:85. Now the premium is very small. Is this not inflationary?I argue that, the Auction system is not the silver bullet to reduce inflation to 300 percent by December 2020. As highlighted, there are so many other inflationary pressures to contend with. What Mthuli should learn us that inflation is not just a monetary phenomenon.
But this is not surprising. Mthuli is a Monetarist or a Neo-Classical, Neo-Liberal Economist who disregard political economy. They just focus on quantitative models which abstract from empiricism. The history of Economic thought is littered with such Monetarists whose god father is Milton Friedman who in a 1968 paper wrote that ” inflation is always and everywhere a monetary phenomenon”
IMF and World Bank Economists prescribe Neo-Liberal economic models which are not suitable for developing economies. Some of the high profile Monetarists include Donbusch Fischer and others. Their famous Zimbabwean research (1989) reached the conclusion that Wages cause inflation. This was very simplistic because the model held so many other factors constant, i.e ceteris paribus. I did a research in my Masters degree thesis (1992) which found the opposite. My econometric model was blended with qualitative analysis and I found that wages alone do not cause inflation.
My point is that, the tools of analysis used at the Ministry of Finance are informed by IMF/World Bank models which are not relevant in the Zimbabwean context. By IMF and World Bank standards, Prof Mthuli would qualify for a Nobel prize as a good disciple of neo-classical theory not applied development economics. And that is the source of our mounting economic challenges in Zimbabwe – the use of irrelevant economic models and prescriptions to run the rudimentary and fractured Zimbabwean economy.
Enjoy the Maji-Marefu economic bulletins!!
Zikomo. Thank you. Mercibeaucoup, Shokran, Twalumba, Hikesike ngopfu, Siyabonga. Asante Sana. Tatenda.

Dr Tapiwa Mashakada is an economist and MP for Hatfield