Mathematical illusion and the slide into poverty

since 1999, this has fallen to less than US$400 and is expected to fall to US$350 per head by the end of 2006. Over 80% of Zimbabweans are now living on less than US$2 a day. The main reasons for this include the Government’s political illegitimacy, corruption and fiscal profligacy all of which have reduced all economic fundamentals to crisis levels.
This week’s release of the August Consumer Price Index (CPI) by the Central Statistical Office (CSO) revealing a sustained increase in inflation from 993.6% in July to 1,204.6% is further evidence of the continued economic meltdown.
According to the CSO, the month-on-month rate for August increased to 29.2% from 25.5% in July- an increase of 4.1%. On the face of it, this appears to be a modest change; however, this has very little bearing to the facts on the ground. Some of the issues that lead the nation to doubt the integrity of the inflation data released by the CSO include the following:
•The fact that the base year used is the Incomes, Consumption and Expenditure Survey of 2001- very unlikely to be representative of present trends;
•The extent (if any) to which parallel market exchange rates are taken into account in determining the monthly CPI. Given the fact that most producers access their foreign currency requirements through the parallel market, and consequently factor this in their pricing policies, failure to incorporate this into the monthly CPI casts serious doubts relating to its integrity.
In light of these doubts, the CSO’s calculations are a mathematical illusion and therefore fail to portray accurately the continued slide into poverty that the majority of Zimbabweans are experiencing.
The key issue to note is that for as long as this illegitimate government remains in power with the resultant pariah status that it has, the economic meltdown will continue. Consequently, hyperinflationary conditions will persist fuelled mainly by continued foreign exchange shortages, capacity utilization difficulties faced by the manufacturing sector, irresponsibly high budget deficits, increased central government borrowings on the domestic market and the illegal quasi-fiscal operations of the central bank.
The shortage of foreign exchange adversely affects the supply side of the economy in that this reduces output by the few producers that are still able to operate. Consequently, until a favourable business environment is restored, shortages will continue. An environment conducive to a functioning economy is one that enables business to generate foreign exchange through exports and one that attracts foreign direct investment, grants and loans. To the extent that the Zanu (PF) government has no capacity to address these basic issues, Zimbabweans cannot hope that a solution to this problem will be found in the foreseeable future.
We must point out that the crusade against the foreign exchange parallel market dealers is a futile exercise as the existence of such a market is a direct result of a dysfunctional economy. What is needed is a policy that addresses all economic fundamentals thereby ensuring that the incentives for the parallel market to exist are removed. Until this is done, the central bank will continue to address the symptoms and not the causes of the problem.
The scarcity of foreign exchange also results in concomitant shortages of fuel and other petroleum products all of which are imported. Since fuel is an important and significant input in the product cost build-up, any worsening supply of foreign exchange in the country leads to increases in the price of fuel. Such increases are, of course, subsequently factored in the prices of various products. Consequently, until industry and commerce can access fuel at affordable prices, hyperinflation will continue unabated.
A further major cause of inflation in this country, is government’s fiscal profligacy; the Zanu (PF) government is clearly unable/unwilling (or both) to live within its means. This is clearly demonstrated by the relentless increase in the budget deficits – a major source of inflationary pressures in this country. A more disturbing development is that these deficits are mainly financed by printing money, a major proportion of which goes in search of foreign exchange from the parallel market resulting in pressure on rates and the scarcity premiums there.
Finally, the quasi-fiscal activities of the central bank Governor are yet another major contributor to inflation in the country. The Governor continues to behave like a Prime Minister, dishing out printed worthless money across all sectors of the economy especially loss-making state-owned enterprises. The Governor needs to be reminded that the generally accepted view is that successful central bankers should be seen neither as heroes nor villains, but simply as competent referees, allowing the game to flow. – Hove is the MDC Secretary for Economic Affairs