Massaging inflation data won't revive Zim economy

HARARE - Prior to December 1991 when the Soviet Union ceased to a communist empire, its flagship broadsheet newspaper was called Pravda, or “Truth.”

But everyone knew it wheeled out fibs.

The credibility of Pravda was so small that those who bothered to peruse it would believe unerringly the opposite of what it tried to report.

Zimbabwe must have learned many lessons from the collapse of the Soviet Union.

But it seems Zimbabwe’s National Statistics Agency (Zimstat) has learned nothing about the futility of massaging economic performance. While official inflation figures released by the State organ Zimstat show a stable year-on-year outturn in August, experts have said consumer price inflation has in fact sharply escalated.

Officially, annual inflation came in at 0,14 percent, which is unchanged from the prior month.

But at least two economics and financial markets authorities — one local, another international — have rubbished Zimstat’s claims.

Leading Zimbabwean financial research firm Equity Axis said despite the stable out-turn, which factors only the formal markets component, inflation is widely believed to have spiked by a huge margin.

Steve H. Hanke, an American applied economist, said Zimbabwe’s annual inflation rate has soared to 242,72 percent, the second highest in the world after Venezuela. I will come back to this later.

Let’s start with Equity Axis.

Looked at inversely, the research firm says purchasing power of the consumer has eroded drastically due to the obtaining discounts prevalent in the market.

Retailers and suppliers of a broad set of products are differentiating prices according to modes of payment, what is being termed the three-pricing system.

Retailers have begun to charge customers three different prices for goods and services depending on the brand of dollar being used: a paper US dollar price, another in “plastic money” or local US dollar-denominated bank deposits transferable by debit or swipe cards, and the last price in terms of the parallel paper money called bond notes.

JP Koning, a leading Canadian economist, has said the three-tier pricing is actually the market’s natural response to a breakdown in the fungibility, or substitutability, of various types of money.

As for bond notes, they were supposed to be pegged 1:1 by equivalent United States dollars held in accounts at an international development bank, the Africa Export Import Bank.

But this promise has proven to be a dubious one as the peg has not held.

This panoply of prices is quite embarrassing to President Robert Mugabe and his cronies as it makes the government look weak. They are trying to put an end to three-tier pricing by forcing retailers to set one universal price for goods using force of diktat.

The penalty for not accepting cash and plastic money at par is up to seven years in jail. Now back to Hanke, he says he estimated Zimbabwe’s present inflation by reviving a gauge used during the hyperinflation era — the Old Mutual Implied Rate.

This compares share prices of the Old Mutual insurance firm in Harare and in London, where it has its primary listing. Harare shares are trading at a sizeable premium.

The only difference between Old Mutual shares traded on different exchanges is that the shares traded in London are denominated in British pounds sterling; whereas, those traded in Harare are denominated in Zimbabwe dollars.

Therefore, says Hanke, if price arbitrage works and Purchasing Power Parity (PPP) holds, the ratio of the Old Mutual share price in Harare to that in London equals the Zimbabwe dollar/sterling exchange rate.

This exchange rate can be transformed using PPP to accurately measure Zimbabwe’s inflation. As of September 29, 2017, Hanke says Zimbabwe’s annual inflation rate has soared to 242,72 percent, not the 0,14 percent being punted by authorities.

Judging from the content of Zimstat’s stagnant figures, it is clear authorities are not reporting honestly on inflation and actually invented a more optimistic message.

What government seems not to understand is that current pessimism about the economy has less to do with the recent spate of bad news than with the policy inconsistency, lack of reliable data on the economy and the opacity of Harare’s process of economic policy-making and its intentions.

Exhibit A is Zimstat’s Pravda-like version of inflation data. This is an example of an ill-advised attempt to prop up a crashing currency.


Comments (2)

the least you could have done is give figures to support your claim

em - 3 October 2017

I think the writer of the article is being dishonest or simply being mischievous. One cannot use the OM share price as it is not correlated to the price of goods and services in the country. It is common cause that the ZSE bull run is artificial and the fungibility of the OM shares across countries in which it is listed is giving rise to the share price increase. The basket that is used to calculate inflation is publicly available. The writer should not be lazy to the extent of waiting for analysts from Canada to give him figures of what is happening in Zimbabwe. The write is advised to collect the prices from the shops and do the calculation. Such calculations can be done on a simple spreadsheet and one does not need to be a rocket scientist to do this.

Petros Magomazi - 5 October 2017

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