Business Blames 'Hot Money' for Surging Inflation

WITH Zimbabwe’s economy in a tailspin again, roiled by the rapidly depreciating Zimbabwe dollar, industrial players believe only one factor is responsible; the creation of ‘hot money’.

‘Hot money’ entails speculative capital flows, which move very quickly in and out of markets, as economic agents seek high profit, consequently leading to market instability.

Market analysts also believe that large bullet payments to public contractors and suppliers to the Government are some of the sources of the excess liquidity that is exerting pressure on the local currency.

This happens when people seek a reliable and safer store of value, which in Zimbabwe’s case happens to be US dollars.

The domestic currency has also suffered immensely from warped confidence due to bouts of hyperinflation that have wiped out people’s and companies’ savings since 2009.

Zimbabwe’s central bank says the excessive demand for US dollars in the country is driven by two key factors; the need to store value in a volatile environment and forex requirements for imports.

Authorities argue though, that the behaviour of the exchange rate is out of sync with fundamentals, as the domestic unit keeps plunging against the greenback despite strong forex inflows.

Depreciation has seen the Zimbabwe dollar, reintroduced at $2,5/US$1 in February 2019, after a hyperinflation-induced hiatus, tumbling to $1,400/US$1 on the official interbank market and changing hands at roughly more than $3,000/US$1 on the parallel market.

Because pricing in Zimbabwe follows changes in the exchange rate, the continuous depreciation of the local currency has caused distortions that have pushed prices higher.

This has seen Zimbabwe’s monthly inflation rate responding in tandem in April 2023, surging by 2,4% in April from 0,1% in March. However, on an annualised basis, the rate slowed to 75,2% from 87,6% previously.