INFLATION could turn sharply higher over the coming months, economists warn, as they weigh the impact of last month”s rate hike against a feared boom in credit.

Figures for May released by the Central Statistical Office last Tuesday showed inflation at 144.4 percent, up 15.3 percentage points year-on-year, the broadest recent advance in price hikes since a 24.1 percentage point rise took inflation to an all-time high of 622.8 percent in January 2004.

Month-on-month inflation rose 13.1 percent in May, just a percentage point short of January”s 14.1 percent rise.

The central bank had apparently anticipated a rise, but perhaps not the magnitude. Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono last month gave a muted outlook on inflation in the immediate term, but still remained bravely bullish for the long term.

The RBZ is looking to slow inflation down to between 50 and 80 percent by December, still a tough task despite it being a downgraded forecast from the previous 20-35 percent.

Despite the RBZ”s optimism, many say the target will become that much harder to hit if central bank does not immediately put a check on money supply growth.

The RBZ has predicted that monetary expansion will halve from 178 percent in January to 90 percent by the end of this year.

This week, the government was scheduled to announce a plan to hand out $1 trillion to people left homeless by “Operation Restore Order”, a promise that should alert RBZ to just where the inflationary hazards lie going forward.

“Government will obviously borrow to honour this latest act of appeasement,” one observer noted this week. State domestic debt is already up four-fold this year at $10 trillion.

Economists say government borrowing has been a strong driver of inflation this year, and the RBZ is under pressure to tighten its purse strings and curb the abuse of a raft of facilities for cheap lending.

It is understood the RBZ has frequently yielded to government pressure to hand over funds held for liquidity management. On one recent occasion, a money market player has told The Financial Gazette, the government asked the RBZ to convert $2.7 trillion worth of two-year treasury bills (TBs) issued for money market purposes into ordinary TBs, at 70 percent, to fund state spending.

This meant the liquidity that had already been mopped up made its way back onto the market, and the RBZ had to tie it up again in fresh TBs.

Last month, Gono agreed that restraining money supply would be key to taming inflation.

“Successful reduction of inflation to low and stable levels demands that, over the medium to long term, the country”s money supply aggregates grow at levels that are consistent with real economic activity,” Gono said.

Raising the key bank rate 65 percentage points to 160 percent, Gono said the hike had come “on the back of the high upside risk on inflation envisaged over the outlook period”.

Gono”s rate hike won widespread market support, but analysts said the intended impact of curbing speculative buying of assets would be offset by the effects of uncontrolled credit expansion.

The RBZ, the analysts said, should therefore back the rate cut with restraint in its policy of handing out cash to parastatals and councils under its strategy to save them from collapse.

The RBZ last week began raising the $10 trillion it pledged for parastatal reform.

It is widely feared that state enterprises, debt-laden and crippled by inefficiency, may use the funds to pay off debts instead of boosting production as intended.

Several firms have been accused in the past of abusing the productive sector facility (PSF), a fund introduced by the RBZ to provide cheap funding to manufacturers. However, other firms have said in their financials that the PSF had protected them from potentially damaging finance charges.

The RBZ will begin calling back PSF funds next Thursday.

The RBZ had funded the PSF from an increase in bank statutory reserves, looking to mop up excess liquidity and curtail speculative activity. However, the same cash found its way back onto the market as the central bank has used those reserves to supply concessionary lending to troubled firms.

Source: AllAfrica.Com
URL: http://allafrica.com/stories/200506230323.htm…br>