ECONOMYNEXT – Zimbabwe’s economy is expected to contract 3.5 percent in 2022 with inflation hitting 285 percent in August 2022, the International Monetary Fund said as the country’s central bank mis-managed money supply and the currency.
Sri Lanka’s central bank generated inflation of 70.2 percent in August after two year of money printing to target an output gap (growth).
The IMF gave technical assistance to the country’s macro-economists who have printed money for 72 years and gone to the IMF 16 times to calculate an output gap.
Reserve Bank of Zimbabwe is one of the most notorious soft-pegged central banks in the world that had created hyperinflation in the past using modern liquidity tools and legal tender laws.
Zimbabwe and the poor had a brief respite as people dumped the central bank’s paper and moved to dollarization, with US dollars, the Euro, South Africa Rand and the central bank lost the ability to conduct ‘monetary policy’.
But the RBZ is now back to conducting ‘monetary policy’ and instability.
Like the Fed, the RBZ had accommodated Coronavirus – a real shock – with monetary policy, a practice which classical economists had argued against from the 19th century. The strategy however was also endorsed by the IMF.
Many central banks also cut rates as economies and credit recovered in 2021. Soft-pegs collapsed in 2022 while reserve currency central banks created inflation not seen for 40 years.
In the West there are widespread strikes. Nationalists are also coming to power, driving out liberals in the economic hardships created by central banks.
Following the political line of the Biden Administration, the IMF blamed the Russia’s invasion of Ukraine for high oil prices rather than Fed money printing, which however is now being reversed.
“Real GDP growth is thus expected to decline to about 3.5 percent in 2022. These multiple shocks will continue to weigh on Zimbabwe’s growth prospects,” the IMF said about Zimbabwe.
“Currency and price pressures, which emerged earlier this year largely owing to a spike in broad money growth and an official exchange rate misaligned with market fundamentals, are subsiding.
“Annual inflation, which had increased to 285 percent in August 2022, has been decelerating since, a trend which if sustained by appropriate policies, would go a long way in anchoring inflation expectations.”
By November inflation was down to 254 percent. RBZ’s RTGS dollar, the new tool through which monetary instability is created in the country fell from 344 to the US dollar at the beginning of 2021 to around 420 by August 2022 and has since started to reverse direction.
The IMF generally advices pegged central banks that commit policy errors and mis-targets interest rates with open market operations or direct budget financing to depreciate the currency.
“The IMF mission notes the authorities’ efforts to stabilize the local foreign exchange market and lower inflation,” the IMF statement said.
“In this regard, the swift tightening of monetary policy along with greater official exchange rate flexibility and a prudent fiscal stance are policies in the right direction and have contributed to a narrowing of the premia in the parallel foreign exchange market.”
As the ‘flexible’ exchange rate falls closer to the parallel rate determined by open market operations of the central bank, state enterprises – energy utilities in particular – runs losses.
As rates rise amid inflation and currency troubles, bad loans rise and banks get hit.
“The financial oversight of the state-owned enterprise (SOEs) by the Treasury should be further strengthened in order to minimize fiscal risks,” the IMF statement said.
“In the context of a tight monetary policy, enhanced regulatory oversight is required to ensure financial sector resilience.”
After printing money, pegged third world central banks blame importers, exporters and expatriate workers as parallel exchange rate emerge due to liquidity injections.
Tax payer money is then used to track and police the victims of central bank injections and sometimes punish them for ‘violating exchange controls’.
“..[T]he authorities have identified large payments to suppliers, the result of over-invoicing, as a source of pressures on the parallel market and in response have launched value-for-money audits and introduced measures to strengthen procurement regulations.” (Colombo/Dec15/2022)