The Zimbabwean month-on-month inflation for February 2023 was a dramatic -1.6% which is a massive 2.3% from 0.7% in January 2023. This seems to suggest that for the first time in so many years, prices of goods and services actually fell in Zimbabwe instead of increasing as has been the norm. The truth however is far more complicated. Prices of most basics and indeed items went up in February 2023. It’s just that the government of Zimbabwe has now changed the way it calculates inflation.

Inflation figures for February 2023 were widely expected to be released on Wednesday 2 March 2023 at a virtual seminar that ZIMSTAT, the body that calculates inflation, was supposed to conduct at 14:00 hours. That seminar was abruptly cancelled with ZIMSTAT citing unspecified issues that were beyond their control. We, at Zimpricecheck, have a strong suspicion that those circumstances were in the form of SI 27 of 2023.

The government has gazetted a new law called Statutory Instrument 27 of 2023 Census and Statistics. Crafted by the Minister of Finance and Development in terms of the Census and Statistics Act (Chapter 10:29) the law makes an important change to the way ZIMSTAT calculates inflation figures.

2. In this notice-

“rate of inflation” means he general increase in price levels of goods and services measured as a weighted average based on the use ofZimbabwean dollars and United States dollars over a given period of time.

3. The dissemination of inflation rates with effect from the date of publication of this notice shall adopt this method of measuring inflation

The two important sections of SI 27 of 2023

This might all look innocuous on paper but this is a massive change. Zimbabwean inflation (measured primarily) in ZWL was 229.8% in January and has now been recorded at 92.3% in February and month-on-month inflation which was 1.10% (actually 2.3% if we consider blended inflation) in January is now negative 1.6%. With the genius stroke of a pen, the Finance Minister has now achieved something that has eluded him for months-bring down inflation to double digits and making month-on-month inflation negative.

This tactful coup glosses over the fact that a lot of utility prices especially for internet, mobile data and electricity have gone up. Econet Wireless Zimbabwe the country’s largest mobile network operator has been increasing the price of their data prices-even their USD bundles have gone up. This change however is also the latest tacit admission that the ZWL dollar experiment is truly and well over. The Zimbabwean dollar is on its last legs even if the government will not admit it.

A survey by ZIMSTAT, used as the basis for the adoption of the blended inflation method, shows that over 75% of transactions in Zimbabwe are now being done in USD. Even the government has been busily gazetting Statutory Instruments that base the price of virtually all government services and payments in USD instead of the doomed ZWL. Even fines are now based in USD again. It’s only a matter of time before ZESA introduces USD tariffs for domestic users. They literary the last remaining reason why the black market still exists.

Dollarisation will bring with it new troubles

The government’s decision to adopt the blended inflation method is a significant change that marks the end of the ZWL dollar experiment. However, this move towards dollarisation will bring with it a new set of problems, chief among them being deflation. While negative inflation may seem like a positive development, it is not necessarily so, as it often signals a decline in aggregate demand. This is because prices are falling not because of increased production or efficiency but rather because demand is declining. As a result, the government is likely to face challenges in stimulating demand and avoiding a fall in aggregate demand.

The reason why demand is falling is not a mystery. People don’t have money to spend. According to a survey by ZIMSTAT, the majority of Zimbabweans earn less than a dollar per day. De-dollarisation has allowed the Finance Minister to hide the fact that more people, in fact, the majority of Zimbabweans, are living in poverty compared to 2017/2018. Using warped exchange rates and slick words, the Minister has been able to convince everyone that all is well in the salary/income category. However, now that de-dollarisation is over, it will be harder to hide this fact.

The largest employed group in the country is civil servants, who are earning paltry salaries compared to what they earned in 2017. It is hard to see how the government will be able to pay them a living wage given that the budget is barely balanced these days and the government will barely be able to afford to pay civil servants. This is likely to lead to social unrest, which will only exacerbate the economic problems facing the country.

There are other problems associated with dollarisation. For instance, most things have been financed by printing money, but the government can no longer do this with the USD. It is unclear how the government will pay contractors for mega projects, farmers, and other expenses. Additionally, the government has been getting some of its forex from forced conversions of export proceeds at favourable rates, which will be gone once the ZWL is gone. ZIMRA’s revenue will fall because most cash businesses do not pay taxes, creating more headaches for the government. Banks will also struggle to give out USD loans as they do not have the money, leading to a further fall in aggregate demand.

In conclusion, while the government’s decision to adopt the blended inflation method marks the end of the ZWL dollar experiment, it will bring with it a new set of challenges, including deflation and repressed liquidity. It remains to be seen how the government will address these challenges, but it is clear that the economic misery is far from over.