Inflation rate to worsen beyond political change

MUPONDA'S ARCHIVED ARTICLES

• Amidst the uncertainty, investors can take chances in Zim

• Managing change in Zimbabwe

• RBZ at the heart of banking crisis

• ZSE party may be about to come to an end

• How interest rates propel Zimbabwe's inflation

• Muponda: Corruption driving Zimbabwe's inflation

• Muponda: How Zimbabwe lost control of inflation

By Gilbert Muponda

ZIMBABWE’S economic meltdown may show signs of receding should the political impasse be amicably resolved.

The latest official inflation figure for February is reportedly 165 ,000%. Should the inflationary pressure maintain its recent momentum till year end, then Zimbabwe’s official inflation will be 2,017, 000 % by mid year further worsening to 24,672,000% by year end.

Once inflation reaches such high levels as Zimbabwe's, it tends to move at an accelerated pace. This is based on current trends -- price controls, shortages, money supply and exchange rate disequilibrium. It should be noted that only three months ago, inflation was around 20,000, now it’s 10 times higher.

Whilst price controls and other strong arm tactics can temporarily delay the slide, the presence of the black market makes it difficult to contain inflation by simply imposing price controls or threatening business. Major policy shift will be required to get Zimbabwe back on track.

It is difficult to conceive how inflation can be stabilised first, then reduced subsequently, without political settlement. During the election period, every province got some ploughs, tractors, combine harvesters, computers and a whole lot of other goodies as is normal in our motherland ahead of elections.

The policy is: give now and pay later. So the full price of such unbudgeted expenditure will have to be factored into future inflation, since the money printing machines worked overtime ahead of elections. Inflation rate is, therefore, expected to worsen before it can be tamed.

This could get worse should there be a run-off election, since more money will be printed to fund that campaign as well. The above inflation forecasts could turn out to be very conservative.

Price controls as an inflation busting measure have created a new problem -- that of having driven up activities in the informal market. Zimbabwe’s formal sector has been shrinking at an alarming rate since everything is now available on the black market or underground.

This trend has disastrous consequences for the fiscus. Black market activities are difficult if not impossible to tax. This means the government loses an important tax base which would have normally been available under normal circumstances. This represents multiple revenue loss since underground hustlers can’t be taxed: no income tax, no V.A.T and no sales tax.

Once the tax base starts eroding, it’s almost impossible to re-cast the net effectively to return to optimal revenue collection through taxation. The tax system is central to the public finance system. This is why governments the world over try to please tax payers. But once the nation relies on printing money, the importance of tax payers and the tax systems is diminished. Any other public finance pattern that’s materially divorced from the tax system is likely to result in a fatal outcome such as unsustainable budget deficit or hyper inflation as in Zimbabwe’s case.

Given that Zimbabwe is at such an important transitional period, it is important that the tax base be widened and strengthened. This requires deliberate and careful planning as many stakeholders are likely to be suspicious of any attempts to make them accountable in a manor that does not show any clear benefits for them. This will build a long term revenue base for Zimbabwe without over-reliance on donor aid and borrowings.

Zimbabwe's financial markets do not yet possess the width and depth required to support an isolated economy. The lack of access to foreign financial markets and normal balance of payment support has limited the options available to raise funds for the government. Further, the shrinkage of the formal sector and closure of many businesses has eroded the revenue base in form of taxes.

A starting point would be for the new authorities to acknowledge the critical role played by the informal sector. There is a need to absorb and transform this sector into the formal complex, and assist this sector to be able to have infrastructure that will allow it to access technical expertise, financial resources and grow.

Obviously, the informal sector alone cannot be expected to resolve the economic challenges facing Zimbabwe. In order to help a speedy recovery of the formal sector, Zimbabwe can borrow ideas from leading nations such as Israel which have well developed policies and systems to help non-resident citizens to return home and fill in a skills gap and strengthen the tax base. This is central in resource mobilisation to sustain any reconstruction effort.

Whilst foreigners will come and invest, it is important that Zimbabweans take their destiny into their own hands in terms of developing the nation.

Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com. See his website: www.gilbertmuponda.com

JOIN THE DEBATE ON THIS ARTICLE ON THE NEWZIMBABWE.COM FORUMS
newsdesk@newzimbabwe.com