'Zimbabwe inflation target achievable'

'Zimbabwe inflation target achievable' - Standard Bank

RESERVE Bank governor Gideon Gono wants inflation below 200pc by December

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By Shoks Mzolo

ZIMBABWE'S year-on-year inflation target of less than 200% in the fourth quarter by the Reserve Bank of Zimbabwe (RBZ) looks achievable, Standard Bank said on Wednesday in its mid-year review research brief on the landlocked country, adding that the target could be attained as early as October.

At the beginning of this year the RBZ introduced various measures to fight inflation at a time when inflation was above 600% y/y. Notable measures were the introduction of a twice-weekly foreign exchange auction market and numerous administrative measures aimed at clamping down on the parallel market.

"The impact of these measures was a rapid decline in inflation from just over 600% to just under 450% in May 2004. The central bank has set an inflation target of less than 200% for the end of the year and the target will probably be attained through a combination of tighter lending for non-qualifying activities and improved supply conditions as production levels increase," Standard Bank economist and author of the brief Robert Bunyi said.

"Food supply has now improved as local smallholder farmers increased output following better rainfall and improved access to farming inputs. The current decline in inflation is, however, not sustainable in the long run, as it is supported by exchange rate controls and low nominal rates that effectively undermine the productive activities of the economy to the benefit of those that are less efficient."

Bunyi expected inflation to revert to an upward trend unless changes to monetary policy were effected. He added that prior to the policy changes announcement last year, the RBZ kept nominal interest rates low. In January interest rates were allowed to rise although real interest rates remained negative.

When the central bank introduced a foreign exchange auction market this year the official exchange rate was Zim$824/US$ the parallel (black) market rate was ZIM$6 000/US$.

"In the first few weeks of the auction system the Zimbabwe dollar appreciated to Zim$3 518 and, subsequently, depreciated steadily. In May and June 2004 the Zimbabwe dollar has been fairly stable which would suggest the RBZ might have set an unofficial peg at Zim$5 300/US$," Bunyi said.

Even though the auction system has introduced some flexibility to the country's exchange rate, it is not entirely a market-related one. The auction rate is only applicable to 75% of export proceeds, and the auction is controlled by the RBZ, which reserves the right to reject bids.

Turning to economic developments, Bunyi said macroeconomic instability has resulted in negative real gross domestic product (GDP) growth rates. GDP is expected to decline by 8.5% in 2004 after a 13.2% decline last year. The government hopes to reverse the declining trend in GDP growth and register positive real growth in 2006.
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