"Price Controls" Driving US Dollar Inflation - Economists
Economists say the Reserve Bank of Zimbabwe’s Financial Intelligence Unit (FIU) is forcing businesses to enforce “price controls” which is in turn fuelling US dollar inflation.
This comes as the Government has been battling exchange rate volatility and a sharp rise in the prices of goods and services in the past months.
In its latest report, the Confederation of Zimbabwe Industries (CZI) said the enforcement of price controls by FIU is inflationary. Reads the report:
The FIU has been harshly enforcing compliance with the prescribed principle of “formal exchange rate plus a 10% margin”.
The enforcement of price controls through the exchange rate by the FIU is actually also inflationary as it causes an increase in United States dollar prices at a time when the American dollar has a higher weight in the blending.
In short, the United States dollar inflation is a compliance-driven inflation as formal businesses tried to hedge against an unrealistic official exchange rate that they were being forced to use.
Economist Gift Mugano told Business Times that if the FIU enforces price controls, it will destroy businesses. He said:
The local firms peg their prices at the prevailing parallel market rate causing the Zimbabwe dollar to be on the high side as the businesses forward price to survive.
If the FIU comes to enforce the indexation of the United States dollar companies would struggle.
However, Finance and Economic Development Deputy Minister Clemence Chiduwa said businesses should comply or perish. He said:
Those who continue to index their prices using the parallel market rates will put themselves out of business as consumers have choices so the United States dollar inflation is for the short term and what is critical is for business to adjust.
The reality is that stability is going to be sustained, we are not going to let go and stability is not transitory. It’s now time for business to start to be ethical.
They can hold on to their current position and see what is going to happen. It is going to be sustainable. They are allowed to take their position but they will lose out in US$ terms as the local currency appreciates.
CZI chief economist Cornelius Dube told Business Times that the Zimbabwe dollar pricing is correlated with the movement of the parallel exchange rate hence the prices will follow that pattern.
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