If you are living in Zimbabwe you don’t need telling that inflation is getting out of hand. It has been years since you purchased your groceries for the same price in different months.
Those who earn in forex currency were at one time shielded from this inflation but now prices are going up in USD terms too. The Reserve Bank of Zimbabwe started this when they clamped down on business pegging prices using the parallel exchange rate, leading to businesses simply raising their USD prices.
So, how bad is this inflation? It was telling that the govt had a celebratory tone when announcing that we had tamed the inflation rate to a mere 60.7% to close out 2021. That was good for the 6th highest inflation rate in the world but when taking into account that inflation had soared to 837.53% in July 2020 one can understand why 60.7% felt like a victory.
We’ve taken a few steps back since the turn of the year. Annual inflation rate in January 2022 was 60.6%, 66.1% in February and 72.7% in March.
The Zimdollar has continued to slide against the USD. On the RBZ’s auction, the Zimdollar’s rate continues to depreciate too. On the 20th of April 2022, one US dollar was worth ZWL$155.14. It was worth ZWL$84.48 on the same day in 2021. That’s an 84% fall in value in just a year.
Those figures are depressing but many agree that they are not even accurate. The actual situation is worse than what these official figures convey, they say. There are a lot of people amused by the Zimbabwean situation and so independently calculate what they think the actual position is.
Zim first in the inflation olympics
One such economist calculating Zimbabwe’s inflation is Professor Steve Hanke of John Hopkins University. This man has been interested in Zimbabwe since its hyperinflationary period that ended in 2008.
He says right now Zimbabwe has the highest inflation in the world. In his weekly inflation dashboard he says on the 21st of April 2022 Zimbabwe’s inflation rate stood at a staggering 207%.
Source: Prof Steve Hanke on twitter
We don’t have the official Zim government April statistics yet but their figure won’t be that high. Let’s look at March to see what the difference was then.
Hanke calculated Zim’s inflation rate at 152% on 31 March 2022, whilst the RBZ reports that it was 72.7%. That is quite the difference.
I gotta say, whenever I visit a supermarket I feel like it’s closer to what Hanke says than what the RBZ says.
How did Hanke get to his figure?
Hank uses the Purchasing Power Parity method. Using this method we compare the price levels between 2 countries and that ratio leads us to the actual exchange rate.
Simply put, Purchasing Power Parity = Cost of good X in currency 1 / Cost of good X in currency 2
Economics nerds go nuts with Hanke and Kwok’s formula:
(1+ ΔPZIM /PZIM ) / (1+ ΔPUS /PUS) = 1 + ΔEZWD/USD /EZWD/USD
PZIM = the Zimbabwe price level in Zimbabwe dollars (ZWD),
PUS = the United States price level in U.S. dollars (USD), and
EZWD/USD = the exchange rate (ZWD per unit of USD).
How it started
In August 2008, the Zim government terminated the reporting of official inflation statistics. It had become too embarrassing to share the increasingly higher figures. I probably would have done the same because the rate was 11.3 million % in July 2008.
So, with the Zim govt not reporting official stats no one really knew what the actual inflation rate was. That’s when Hanke and Alex Kwok decided to take on the challenge.
They faced hurdles trying to do this because the Zimdollar was not traded freely on an organised market. In addition, the black market was chaotic and there were different rates for cash and non-cash Zimdollars. Are you sure we’re not living in 2008?
In the end they got around this problem and came up with the now famous (and infamous in some other circles) Old Mutual Implied Rate (OMIR).
It’s simple to understand the logic behind that method. They saw how Old Mutual shares were listed on both the Zimbabwe Stock Exchange and the London Stock Exchange.
With these being shares of the same company it stood to reason that the actual value of the shares in both countries was equal. So, we could calculate the market-based exchange rate by comparing the price of the shares in Zimdollars and pounds.
The RBZ hated that OMIR and then governor Gideon Gono said the economy was,
…being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itselfDr Gideon Gono
History repeats itself
It’s 2022 and the data void that plagued the economy in 2008 is back with a twist.
In 2008 there was no reliable market where the Zimdollar was being traded freely. In 2022 we have the RBZ auction where the Zimdollar is traded. However, most analysts do not think the official auction is reliable because it is not really a free market. The RBZ exerts control over it.
The black market in 2008 was chaotic with multiple exchange rates for cash, debit cards, cheques and bank transfers. In 2022 we can add a mobile money exchange rate to the preceding list of black market exchange rates.
So, of course the OMIR came back to the rescue but just like in 2008, the authorities were having none of it.
In March 2020 the ruling party and the Minister of Finance were in agreement and decided to suspend the fungibility of dual listed stocks. Or in English, they made sure shares for companies like Old Mutual that were listed on both the ZSE and another exchange could not be treated as like for like.
They restricted investors’ ability to trade their Zim bought Old Mutual shares on foreign exchanges. All to kill the OMIR.
The suspension on fungibility ended in March 2022 and Mthuli Ncube revealed that the govt was ready to restore it. So, OMIR lives to see another day.
The Zim govt no doubt wants to report a low exchange rate but this does not automatically mean the official rate is artificially low. However, the actions they have taken to make sure the official auction rate stays low have been questioned by many analysts.
On the other hand, economists like Hanke no doubt get more engagement when they report about crazy inflation rates and so would be partial to reporting high rates. However, they don’t really have a dog in this fight and so are unlikely to play with the figures to come up with higher inflation rates.
Besides, the PPP method is documented and other economists can verify the calculations.
With all that said, you decide which figures you trust.