Batanai Matsika 
A recent tweet on Zimbabwe inflation estimates by Professor Steve Hanke, a Professor of Applied Economics at the Johns Hopkins University and senior fellow at the Cato Institute, has caught many by surprise given that his y-o-y inflation of 455 percent is below the official figure of 761.02 percent.
Hanke also stated in his tweet that it is “absolute nonsense” to claim that Zimbabwe is experiencing “significant hyperinflation”.
To him, Zimbabwe is nowhere near hyperinflation. His method involves calculating implied annual inflation rates using high-frequency data. According to Hanke, the most important price in an economy is the exchange rate between the local currency and the world’s reserve currency (US dollar).
As long as there is an active black-market for currency and the data are available, changes in the black-market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.
Meanwhile, Zimbabwe Statistical Agency (Zimstats) has published inflation rate statistics for the month of August 2020, and it has stated that annual inflation at the end of August 2020 went down by close to 76 percent to 761.02 percent.
There has always been an open debate between Mthuli Ncube (also a professor) and Hanke on the method used to calculate inflation. While it is nearly impossible for two economists to agree on anything, what we can take away from all this is that inflation in Zimbabwe has been coming down over the past couple of months.
It would appear that monetary authorities are getting it right in as far as anchoring inflation expectations within the broader economy is concerned. The important question is not about the correct inflation figure for Zimbabwe. It is whether this trajectory will be sustained?
In our analysis, we have used the expectations-augmented Phillips Curve to demonstrate the impact of (i) inflation expectations and (ii) other factors such as exchange rates and external shocks on inflation numbers.
The expectations-augmented Phillips curve shows that inflation depends on (i) inflation expectations (ii) the gap between output and its natural level (output gap) and (iii) Other factors and temporary inflationary shocks. The following is the formula;
Where;
Inflation Expectations – represents the public’s expectations at time t. This means that a 1-point increase in inflation expectations raises inflation by exactly 1 point. In Zimbabwe, economic agents have been using the parallel market exchange rates as a gauge for pricing. This could explain government’s position on the implied exchange rates such as the Old Mutual Implied Rate. Without a reference point or benchmark, the public has no predilection to push the exchange rate or prices up.
The Output Gap – is the gap between GDP and the natural level of output. We would expect this natural level of output to gradually increase over time as productivity levels improve. In Zimbabwe, the decline in capacity utilisation to 30 percent on the back of FX shortages and high costs of critical raw materials (fuel and electricity) implies that the output gap is negative. This has an impact of reducing the overall inflation number.
Temporary Inflationary Shocks and Other Factors – While inflation expectations and the output gap may be key drivers of inflation, they do not capture all the factors that influence inflation at any time. For example, supply shocks like a temporary increase in the price of imported oil can drive up inflation for a while. In the case of Zimbabwe, shortages of FX have a strong effect on inflation given that the country is import-dependent.
Overall, while we have witnessed a massive crackdown on underground currency trading in Zimbabwe that has included placing transaction value limits on mobile money platforms like Ecocash and the suspension of the trading of dual-listed stocks on the Zimbabwe Stock Exchange (ZSE), the real test is on managing money supply growth in the midst of economic and political pressures.
Most of the Zimbabwe’s key productive sectors like mining, agriculture and manufacturing need liquidity support.
Zimbabwe is fast-moving into a post-Covid era, the economy has opened up, civil servants want salary hikes and risks of social unrest remain elevated.
How long can the liquidity taps remain closed? In the absence of a straight answer to this question, we insist investors to park ZWL balances in value-preserving stocks. Financial services stocks like Old Mutual Zimbabwe Limited and ZB Financial Holdings exhibit strong upside potential given the gains from real estate holdings and equity investments. We also like well-managed exporters and companies with regional exposure such as Simbisa Brands, Padenga Holdings, SeedCo Zimbabwe Limited.
● Matsika is head of research at Morgan & Co, and founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
