Monday, November 13, 2017 12:55 PM / BMI Research
BMI View: While the data released by Zimbabwe's central bank points to stable prices, this belies the reality of an increase in the cost of goods and services when paid for in bond notes or via electronic transfer. Our forecasts will continue to reflect prices denominated in cash payment values in line with the central bank, but we highlight the risks businesses face from rising costs when paid for in bond notes or electronic transfer.
The Reserve Bank of Zimbabwe's (RBZ) decision to release inflation data quoting prices in hard currency terms points to the likelihood of a growing disparity between official statistics and reality on the ground. In line with house standards, we will continue to forecast inflation data based on the RBZ's own methodology, but we highlight the risks of rising costs for businesses operating in Zimbabwe. Anecdotally, inflation has reached as high as 60.0% y-o-y in recent weeks for goods and services paid for with bond notes – a quasi-currency issued by the government to ease illiquidity in the economy – or via electronic transfer.
This divergence from the RBZ's official figures is largely a reflection of the growing shortage of hard cash circulating the economy. Since Zimbabwe adopted the US dollar as its official currency in 2009, large current account deficits and limited inflow of foreign investment have seen the supply of cash fall to the point where it has become a headwind to economic activity. In this environment, businesses have struggled to access the dollars needed to import goods from abroad, leading to shortages at fuelling stations and in supermarkets.
While shortages of goods typically lead to an increase in prices, such is demand for hard currency amongst businesses that they have essentially offered a discount to customers paying in cash, explaining the stable inflation rate reflected in official data. However, these shortages are reflected in the price of goods when paid for in bond notes or via electronic transfer. As neither of these forms of payment can be liquidated into a means of buying imports, businesses have begun to charge a substantial premium when accepting them, essentially established a dual-currency system.
Price Disparity Shows No Sign Of Slowing
With the prospect of a sufficient recovery in Zimbabwe's balance of payments looking unlikely, we believe the country's shortage of hard cash will continue to weigh on economic activity and confuse monetary policy over the coming quarters. While official inflation data will continue to reflect the discount businesses are applying to hard cash payments, a combination of continued shortages and the likely growth in the supply of bond notes and use of electronic payments will see inflation remain high for the large portion of the population that cannot access dollars. As we have noted before, with the memory of crippling hyperinflation still fresh in the minds of many Zimbabweans, the possible return of runaway prices will add another headwind to political stability over the coming months in the approach to the 2018 election.