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Wednesday, 10 October 2007

Random forecasts...

The Bank of Zambia are now confident of hitting a 7% inflation target in 2008. Read more here. Not sure what to make of this latest prediction, considering the Bank forecast a 5% inflation target for 2007 at the time of the Budget Report. That of course was revised two months later. We now know that inflation is still overing just below 10%, and of course the situation may get worse with the latest fuel squeeze.

6 comments:

  1. what type of data do this guys have when making these FORECASTS?
    it makes me wonder if really these guys are the right people for the jobs.

    how can you be so focused on inflation and turn a blind eye to the other issues that can render the lowerring of inflation useless.this is money we are talking about,as most people know that time is money.

    a simple hygiene issue like cholera can bring chaos to the guys at BOZ.

    are sure that this forecasts can be met or we are just trying to be employed. how can these guys allow the fuel crisis to happen.

    one lovely question which should be answered who is going to lose out when we have a single digit inflation. the other thing is how long will the economic setup sustain the single digit inflation.

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  2. how can you be so focused on inflation and turn a blind eye to the other issues that can render the lowerring of inflation useless.

    It is called focusing on the macro-economic indicators that the World Bank and IMF neoliberals find important.

    This and other measures they have demanded have been called 'recessionary measures' by Zambia's own minister Patel. And of course they are.

    No economy has ever developed following the IMF's policy prescriptions ('privatisation', low inflation, forced globalisation, etc.).

    And of course these measures have been an abysmal failure.

    Focusing on low inflation without even wanting to understand why inflation is high, ignores the real drivers of inflation, and fails to understand that inflation is a symptom and an indicator, not the objective itself.

    Instead, they should have asked:

    - do the people have more money and/or more purchasing power?
    - are more children in education and covered by healthcare?
    - has unemployment gone down dramatically?
    - how many businesses are now operating in the official sector, as opposed to the unofficial sector?
    - how many subsistence farmers have become commercial farmers?

    one lovely question which should be answered who is going to lose out when we have a single digit inflation.

    Why is there single digit inflation? High interest rates help - which are a brake on borrowing, at least by official businesses (and most businesses are in the informal sector, so they don't qualify for loans to begin with).

    the other thing is how long will the economic setup sustain the single digit inflation.

    And why would it matter? Because inflation is merely an indicator of the imbalance between the amount of money in the economy and the goods/services that are on offer.

    If there are few goods on offer, it is easy to lower inflation by reducing the amount of money that is chasing those goods - increase interest rates, reduce the amount of paper money that is in circulation. But neither actions increase the amount of goods that are available. Not when there are other than monetary constraints operating inside the economy - land ownership issues, bad or missing infrastructure, low or no incomes, etc.

    Obviously, you can reduce the amount of money in circulation to reflect the limited amount of goods on offer and achieve low inflation. But it does not create development, or increase production when other factors than inflation are constraining production.

    This is why increasing production is the only way to go, and Zimbabwe has understood that, and the Mwanawasa government has not. They are completely focused on attracting foreign investors, and in a way that has a minimal impact on the economy and nearly zero impact on government revenues.

    But FDI is another rigid policy that the IMF has adopted as a global policy prescription - because it worked in Singapore, half a century ago. The problem is, Singapore's economy was unique, and it's prescriptions were too.

    Without understanding it, these neoliberal cadres are beholden to the Chicago Boys and Leo Strauss.

    Interesting quote from Wikipedia: "Shadia Drury, in Leo Strauss and the American Right (1999), (1999), argues that Strauss taught different things to different students and inculcated an elitist strain in American political leaders that is linked to imperialist militarism and Christian fundamentalism."

    Certainly that kind of elitism can't have helped improve democratic accountability in their followers. In fact, the present leadership in the US fiercely anti-democratic and against all accountability of those in power.

    It is not for me to say how much of this translated into neoliberals worldwide, of course. However, there is a strong streak of authoritarianism and a general sense of 'being above it all' running through the MMD, MDC, etc.

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  3. "one lovely question which should be answered who is going to lose out when we have a single digit inflation. the other thing is how long will the economic setup sustain the single digit inflation". - Anonymous

    Interesting question.
    The answer to that depends on the short run - long run distinction.

    In the short run, low inflation would most likely come at the cost of poor wages. What normally makes inflation run fast is high wages. So to really control inflation in the short run you got keep the wages under control. So in short the poor worker suffers. He / she has to accept bad terms year on year as Government controls.

    Obviously Government cannot control what the private sector pays, so what it tries to do is control what the public sector wage bill. As you know Zambia has a large public sector. LPM announced earlier this year that 65% of Government revenue went on budget. To control inflation in the long term Government needs to ensure that negotiations of wages does not return to the FTJ days of 20% plus wage increases.

    So low inflation is facilitated by poor wages to the public sector.

    Now in the long term, I believe there are no costs just benefits. Low inflation allows companies to plan better for the future and hence should lead to more investment and lower interest rates and so forth.

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  4. The question is - why is inflation low?

    Is it low because there has been an increase in the amount of goods and services produced?

    The answer is no.

    And what is more important for the small section of the economy that is above ground, is that interest rates have not followed inflation, even into single digits, so borrowing has not increased.

    This is what happens when you have a government that only focuses on macro-economic issues, and leaves micro-economic issues alone because 'the market will take care of it'.

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  5. "The question is - why is inflation low?" - MrK

    Zambia's current low inflation is being driven by a range of factors.

    The growth in agriculture production has meant that maize prices have remained relatively stable compared to recent years. But crucially the Kwacha has been kept fairly strong and therefore it has meant that the farmers are more or forced to sell the maize domestically. The Kwacha holds its strength to increasing FDI. $1 billion alone in the last nine months we are told.

    The strength of the Kwacha has also meant that impact of oil of prices has been mild. Of course with the poor management of oil, we can expect some effects now cripping in. Although it does appear that its the common who hasn't been able to get the oil. Most of the production companies have done okay.

    But the key driver is inflation expectations. If people expect inflation to go up they demand higher wages. It does appear that inflation expectations have really changed. As I said in the past, 20% wage increases were common. But not now. Earlier in the year Government reached a settlement with civil servants of about 4%.
    With such low increases, inflation is being kept underwraps.

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  6. Cho,

    I can't find the post on the survey of constraints on small businesses in Zambia. However, I found the following survey of existing businesses in Zambia, which lists their major concerns when doing business in the country.

    This page lists the main concers of businesses doing business in Zambia. Top of the list is access to capital, followed by taxation and economic/regulatory uncertainty.

    http://www.enterprisesurveys.org/ExploreEconomies/Graph.aspx?economyid=207&year=2002


    This article from the IMF, where they discuss the negative impact of Free Enterpize Zones on revenue collection. Which is ironic, because such zones should be improving business and one would expect, state revenues.

    18. The Government will, in 2004, complete a review of the potential adverse impact of the Export Processing Zone Act on the revenue base and particularly in the area of direct taxation. The review will be completed in time for its conclusions to be addressed, if necessary, in the 2005 budget.

    http://www.imf.org/External/NP/LOI/2004/zmb/01/index.htm

    ReplyDelete

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