Inflation spike up to 4,6pc won’t hurt GDP

Zimbabwe can afford increases in annual inflation under the multi-currency regime to a maximum of 4,6 percent without hurting optimal economic growth thresholds, empirical evidence from a study conducted by the Reserve Bank of Zimbabwe (RBZ) shows.

The country’s annual inflation rate for June 2018 gained 0,20 percentage points to settle at 2,91 from 2,71 percent in the previous month, according to figures from the Zimbabwe National Statistics Agency (ZimStats).

The RBZ study conducted this year, estimated the growth optimising inflation rate for Zimbabwe and provided critical answers into long outstanding question of growth maximizing inflation rates, essential for policy making.

An empirical question, the research findings from the RBZ study show; relevant for policy, pertains to the optimum inflation rate for a country in light of the fact that low or excessively high inflation discourages growth while moderate inflation is pro-growth.

Review of Zim inflation

The study shows that using data for the period 1980 to 1997, an optimal inflation of 8,7 percent was ideal for Zimbabwe, when the country had its own currency. As expected when the country is in a multi-currency system, where the US dollar is the main currency, the optimal inflation is lower at 4,6 percent,” the RBZ said.

Under multi-currency, the inflation profile for Zimbabwe should not differ significantly from the inflation rates of countries of anchor currencies.

In Zimbabwe these include mainly the US and South Africa inflation rates. The southern African country adopted a basket of foreign currencies in 2009 at the height of hyperinflationary period in the country.

The country’s inflation during the period of hyperinflation and economic instability peaked at 231 million in July 2008, at the last official count.

The RBZ says in the decade to 2008, due to high inflation, Zimbabwe’s economy contracted by about 50 percent.

What inflation is optimal for Zim?

The main policy conclusion from the optimal inflation analysis is that to ensure optimal growth, there is a certain level of inflation that is required in the economy, the RBZ study established.

“Under multi-currency, Zimbabwe’s inflation can rise to 4,6 percent without necessarily hurting economic growth. Beyond 4,6 percent, however, inflation will contribute negatively to growth.”

Zimbabwe uses a basket of currencies dominated by the US dollar. Given that the US inflation is normally targeted at around 2 percent, Zimbabwe’s inflation is expected not to deviate significantly from 2 percent so that there is no substantial over and undervaluation of the real exchange rate for the country.

Further, the results for both own currency and multi-currency regimes showed that the country’s optimal inflation rate is broadly consistent with the regional inflation targets of 3 percent to 7 percent for SADC.

In this regard, it is important to ensure that the country’s inflation remains within the regional target to ensure maximum growth.

There are currently some concerns about surges in the country’s annual inflation rates, pushed up by currency premiums due to prevailing cash shortages and limited access to or shortage of foreign currency.

Importers and manufacturers who struggle to obtain foreign currency under the RBZ’s priority list allocation framework end up on the parallel market where they buy the hard currency at high premiums. The cost of these premiums is then factored into prices.

Critical to note in the estimated results, is the fact that the growth maximising level of inflation after 2009 is lower than what obtained before the 1998/2008 crisis period. In fact, before the crisis the country’s optimum inflation was about double what it is after the crisis.

The central bank study shows that there may be a threshold level of inflation that may be conducive for growth. As seen above, very low inflation or negative inflation also impacts negatively on growth.

Against, this background both very high inflation and very low inflation, can negatively impact on growth. “What is required is a low and stable inflation to support optimal growth in the economy.”–ebusinessweekly.co.zw

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