Prices of local goods and services are on the increase and fast catching up with pre-Zimbabwe dollar levels despite government success in stabilizing the exchange rate which was expected to curb inflation, 263Chat Business has established.
Zimbabwe re-introduced its local currency (ZWL$) in February last year sparking hyper- inflation of over 700 percent year on year as exchange rate pressures mounted.
However, following government’s introduction of the foreign currency auction system, the exchange rate stabilized but prices of goods and services continue to surge in both the local and USD currencies.
The economy is somewhat re-dollarizing despite authorities having called for a mono-currency system led by the local currency last year.
A 50 percent electricity tariff hike by the power supply company, ZESA this week on top of yet another 50 percent increase the previous month attests to the price trends on the market.
Economic analyst, Victor Bhoroma in an interview with 263Chat Business said the development is a factor of the market self-correcting and effects of scrapping subsidies on key production inputs such as fuel and electricity.
“During the course of de-dollarizing the local economy experienced a lot of subsidization in terms of the pricing for various goods and services in the local market,” he said.
“So what happens is that most companies are actually sort of correcting what has been happening in the market and they are falling back to the prices that prevailed around 2015 to 2018. In a way it is inflationary because you would expect the situation where you just cross rate to what you were paying in Zim-dollars and get the equivalent in USD but unfortunately it has not been the case because most companies are just auto-correcting adjusting their cost element and going back to the 2015-18 era,” he added.
Since 2018, government has been subsidizing the procurement of fuel, maize, wheat, soya bean and electricity among other essential products.
During this period, the Zim-dollar was rapidly losing value against the USD and prices in real terms (USD) fell drastically.
A classic example lies in the telecommunications sector, where due to the monetary policy changes in 2019, at one point voice calls tariffs declined to as low as US$ 0.02 per minute from US$ 0.16 per minute between 2015-18.
In June, fuel went up 150 percent after government abandoned its fixed exchange rate policy and ever since then other production segments have seen prices go up, including labor costs which has seen some companies pay a fraction of salaries in USD.
“The major cause is the key input to production which is fuel, and it’s now being charged in USD and also when you look at the labor element, most companies are actually paying a portion in USD now,” Bhoroma added.
However, in his 2021 Pre-Budget Strategy paper, the Finance and Economic Development Minister, Mthuli Ncube said inflation is expected to slow down to 134 percent by end of year on account of sustained gains from the foreign currency auction market, which is expected to aid exchange rate stability.
Market watchers are skeptical that inflation will be contained under the current environment, predicting prices go higher than the official figures owing to increases in operating costs in the second quarter of 2020.
Many companies have been registering growth in operating expenses as the economy is re-dollarising and the Half Year 2020 Postal and Telecommunications Regulatory Authority of Zimbabwe (POTRAZ) figures showed that operating costs in the sector exclusive of foreign currency grew by 42 percent and when factoring in operating costs inclusive of foreign currency, losses jumped by 217.7 percent.
