HomeBusinessInflation Rate To Worsen Beyond Political Change

Inflation Rate To Worsen Beyond Political Change

 ZIMBABWE’S economic meltdown may show signs of receding should the political impasse be amicably resolved.

The latest official inflation figure for February is reportedly 165 000%.

Should the inflationary pressure maintain its recent momentum till year-end, then Zimbabwe’s official inflation will be 2 017 000% by mid year further worsening to 24 672 000% by year-end.

Once inflation reaches such high levels as Zimbabwe’s, it tends to move at an accelerated pace. This is based on current trends – price controls, shortages, money supply and exchange rate disequilibrium. It should be noted that only three months ago, inflation was around 20 000%, now it’s 10 times higher.

Whilst price controls and other strong- arm tactics can temporarily delay the slide, the presence of the black market makes it difficult to contain inflation by simply imposing price controls or threatening business. A major policy shift will be required to get Zimbabwe back on track.

It is difficult to conceive how inflation can be stabilised first, then reduced subsequently, without political settlement. During the election period, every province got some ploughs, tractors, combine harvesters, computers and a whole lot of other goodies as is normal in our motherland ahead of elections.

The policy is: give now and pay later. So the full price of such unbudgeted expenditure will have to be factored into future inflation, since the money printing machines worked overtime ahead of elections.

The inflation rate is, therefore, expected to worsen before it can be tamed.

This could get worse should there be a run-off election, since more money will be printed to fund that campaign as well. The above inflation forecasts could turn out to be very conservative.

Price controls as an inflation busting measure have created a new problem – that of having driven up activities in the informal market. Zimbabwe’s formal sector has been shrinking at an alarming rate since everything is now available on the black market or underground.

This trend has disastrous consequences for the fiscus. Black market activities are difficult if not impossible to tax. This means the government loses an important tax base which would have normally been available under normal circumstances.

This represents multiple revenue loss since underground hustlers can’t be taxed: no income tax, no VAT and no sales tax.

Once the tax base starts eroding, it’s almost impossible to re-cast the net effectively to return to optimal revenue collection through taxation.

The tax system is central to the public finance system. This is why governments the world over try to please taxpayers.

But once the nation relies on printing money, the importance of taxpayers and the tax systems is diminished. Any other public finance pattern that’s materially divorced from the tax system is likely to result in a fatal outcome such as unsustainable budget deficit or hyper inflation as in Zimbabwe’s case.

Given that Zimbabwe is at such an important transitional period, it is important that the tax base be widened and strengthened.

This requires deliberate and careful planning as many stakeholders are likely to be suspicious of any attempts to make them accountable in a manor that does not show any clear benefits for them.

 

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