Zimbabwe: Inflation Surges

Zimbabwe: Inflation Surges Under Threat

Date Posted: Friday 16-Apr-2010

By Chris Muronzi and Bernard Mpofu

FINANCE minister Tendai Biti yesterday painted a gloomy picture of the economic outlook in the face of rapidly rising inflation and a crippling public service wage bill, warning government might be forced to crack the whip on business barely a year after liberalisation to curb price increases.

Biti's ominous delivery on the economic situation would have caused anxiety among the business sector and ordinary members of the public who thought the economy was fast recovering while inflation was a thing of the past.

Zimbabweans are still trying to recover from the ravages of hyperinflation -- which scaled trillion-dollar levels -- hardly a year and a half ago. Hyperinflation had left many businesses in ruins and livelihoods destroyed.

Biti told journalists in Harare yesterday that although economic stability had been restored, the economy was still facing serious "downside risks" which could "reverse the gains realised" to date.

In a statement on the economic performance in 2009 and the first quarter of this year, Biti said the major threats to the economy were building inflationary pressures, lack of fiscal space, an unsustainable high wage bill or employment costs, lack of investment in power generation, water and road infrastructure rehabilitation, vulnerabilities in the financial sector and a deteriorating balance of payments situation.

In an announcement which could shock the public and arouse nightmares of the past, Biti said inflation had resurged and quickened from an annual average of -7,7% in December last year to -4,8%. Month-on-month inflation rose to 1% in February from 0,7% in January.

"The build-up in inflation is being driven by rising prices of food, non-alcoholic beverages, health, education, as well as services of public utilities," Biti said. "Such a situation is threatening disinflation gains of 2009 as well as the objective of maintaining within targeted single-digit levels."

Biti said it was critical to rationalise the pricing of public services to contain inflation within single-digit margins and "avoid the economy slipping back into a high inflation environment".

If the current inflation trend continues, Biti warned, the annual inflation rate could surge to 10% against a projected 5% by year-end.

"There are strong signs that inflation is on the increase as demonstrated by the month-on-month inflation of January and February 2010," he said. "What is clear and self-evident is that speculation tendencies are back on the market and that there is a huge constituency of the business sector that is keen to draw us back to the hyper-inflationary matrix of 2008," he said. "Going backwards where there was no confidence and business people increased prices for the sake of increasing prices, we will not accept that."

Biti attacked industry for "having its own cake and eating it". He said they had benefited from economic liberalisation but were profiteering. "They (business) cannot expect us to play basic liberal economics when they themselves are not playing by the book," he said. "Business cannot have their cake and eat it. We are making a clear message that we are not accepting inflationary pressures on our economy."

But industry has justified price increases citing high public utility tariffs. Biti however says since January there has not been any public utility tariff increases.

On the wage bill, Biti proposed a freeze in civil servants' salaries, saying they were too high and unsustainable. He said the civil service wage bill accounts for 70% of the total domestic budget revenues. Government has a 236 000 staff complement, which the treasury minister said was "too high for an economy such as ours".

However, he said the figure could be reduced should an ongoing public service audit unearth ghost workers.

"Such a proportion of the budget wage bill, which is far above international thresholds would, if not corrected also crowd out necessary capital development expenditures and hence compromise economic recovery and growth prospects," Biti explained.

The minister warned that his ministry would invoke "statutory instruments" to encourage lending from the country's financial services industry. He said government was "equally concerned" with the "huge disparity" between bank deposits' and lending rates.

The minister said unattractive interest rates on deposits of less than 0, 2% and high lending rates of 25% per annum by some banks would not encourage a savings culture in the country.

"Such a situation is also unacceptable as this is counter-productive to the country's economic recovery and growth efforts...Government will in the meantime observe the behaviour of the financial institutions in adhering and complying with this request, failure of which legal instruments would be invoked through the central bank in order to correct market failure in this regard," Biti warned.

Biti said balance of payments remained in a "precarious" position burdened by a negative trade balance of US$1,6 billion. This, he said, has further compromised industry competitiveness.

A negative balance of payments position means that a country imports more than it exports.

Biti also bemoaned the absence of foreign direct investment and vote of credit saying there was need for policy clarity on indigenisation.

An empowerment law forcing foreigners to "cede" controlling stakes to indigenous Zimbabweans has spooked investors and split the unity government.

Biti said although government had hoped to have a budget deficit of US$810 million to be funded by the donor community, the treasury was "left alone" and only got a meagre US$2,9 million.

He said: "Put simply and differently, we have received only US$2,9 million from donors. This reflects what we have been saying all along that we are on our own."

Turning to external debt, he said government had adopted a "hybrid approach" that entails the use of a natural resources and the Highly Indebted Poor Countries (HIPC) strategy in its bid to clear a ballooning debt owed to multilateral institutions.

Zimbabwe owes the International Monetary Fund, the World Bank, and African Development Bank close to US$6 billion in arrears, he revealed.