RBZ stops Publishing ZWL CPI : Firms caught between the Hard and Rock Places. The Blended Inflation Saga.
The Reserve Bank of Zimbabwe (RBZ) released a Monetary Policy Statement on February 2, 2023, aimed at reviewing the current monetary policy measures. The statement outlined a number of measures that the RBZ is taking to address the challenges facing the Zimbabwean economy, including:
- Reviewing the policy rate to 150%: The policy rate is the interest rate that the RBZ charges banks for loans. Raising the policy rate will make it more expensive for banks to borrow money, which will in turn make it more expensive for businesses to borrow money. This is intended to slow down economic activity and reduce inflation.
- Reducing the amount of money in circulation: The RBZ is also taking steps to reduce the amount of money in circulation. This will help to reduce inflation by making it more difficult for people to borrow money and spend it.
- Promoting exports: The RBZ is also encouraging businesses to export more goods and services. This will help to earn foreign currency, which can be used to import essential goods and services.
- Improving the investment climate: The RBZ is also working to improve the investment climate in Zimbabwe. This will make it more attractive for businesses to invest in Zimbabwe, which will create jobs and boost the economy.
The RBZ has said that it is committed to taking the necessary measures to stabilize the Zimbabwean economy. The measures outlined in the Monetary Policy Statement are a step in the right direction, but it remains to be seen whether they will be enough to achieve the desired results.
Here are some of the key takeaways from the RBZ’s Monetary Policy Statement:
- The RBZ is committed to taking the necessary measures to stabilize the Zimbabwean economy.
- The RBZ is reveiwing the policy rate to 150%.
- The RBZ is reducing the amount of money in circulation.
- The RBZ is encouraging businesses to export more goods and services.
- The RBZ is working to improve the investment climate in Zimbabwe.
The RBZ’s Monetary Policy Statement is a positive step, but it remains to be seen whether it will be enough to achieve the desired results. Only time will tell whether the RBZ’s measures will be successful in stabilizing the Zimbabwean economy.
The core focus will be on hyper inflationary accounting and the use of exchange rates in financial reporting. The Monetary Policy Statement brings up
several questions regarding the impact on financial reporting, particularly IAS (International Accounting Standards) 29 Financial Reporting in Hyper inflationary Economies. IAS 29 already had a myriad of issues regarding the general price index usage where practitioners have questioned whether the general consumer price index (CPI) reflects the basket that the various entities may be subject to. For example, the basket of goods in the CPI used for restating is likely to be different from a company which operates in the industrial sector meaning that the accuracy of restatement will be questionable. Now, the adoption of a blended inflation rate as the country’s reference inflation raises concerns about what constitutes the blend and its relevance in IAS 29 reporting.
Before we delve into the impact of the monetary policy statement on specific aspects of IAS 29, it is imperative that we have a brief understanding of how hyperinflationary accounting works. With hyperinflationary economies, you find that the prices of goods and services change rapidly over time, either daily or weekly. This constant change in prices makes it difficult to make a comparison between different periods of an entity’s financial statements and the differences in the revenues also hamper one’s ability to make decisions based on these numbers.
The standard aims to make past transactions/acquisitions comparable to today’s transactions by adjusting them to current terms. This is done is by taking the
CPI on the date of the past transaction and dividing it by the CPI at the reporting date, the resultant number is what is called an adjustment factor, and this is multiplied by the value of the past transaction to come up with its current value, adjusted for inflation.
The ongoing debate on the usage of the Consumer Price Index (CPI) as a measure of inflation in IAS 29 still stands, and the blended inflation rate may add to this uncertainty. It remains to be seen if the pure Zimbabwean dollar-denominated inflation rate will still be available.
Another issue that arises from the blended inflation rate is the question of a company’s functional currency. If the
blended inflation rate has most US dollar elements, then why would a company still have the Zimbabwean dollar as its
functional currency and how does one apply this blended inflation rate to ZWL transactions when there is an element of USD inflation in the CPI numbers?
Another question that would also come to mind is in the determination of whether the Zimbabwean economy has ceased to be a hyperinflationary economy, would the blended rate be used to determine this as it is naturally going to be lower than the ZWL inflation figures?
