Zim needs an expansionary fiscal policy

Published: 17 December 2013

The inflation rate in Zimbabwe continues to decline and this is an indication that the country`s aggregate demand continues to be depressed entailing that the country continues to suffer from low economic activity levels.

Based on figures released by Zimstat, the inflation rate was recorded at 0.54 percent in November of 2013 shedding 0.05 percent points on the October 2013 rate of 0.59 percent. This means that prices as measured by the all items CPI increased by an average of 0.54 percentage points between November 2012 and November 2013.

According to the figures the decline was contributed by a drop in the rate at which prices of food and non-alcoholic beverages rose. The inflation of food and non-alcoholic beverages stood at - 1.51 percent.

This may be due to the increased supply through imports and the depressed demand as a result of low disposable incomes.

This is not to say that the country needs high levels of inflation, but the country needs a reasonable rate of inflation that stimulates economic activity. And too low levels of inflation will not attract business activity as a result slow to stagnant economic growth. Supply is attracted by demand and where there is no demand then supply will not follow.

Why then do we say government needs to employ an expansionary fiscal policy?

This is so because, by injecting a reasonable amount of money in the economy, activity will be revived and demand increases. Investment is attracted mainly by the ability of the relevant markets to buy the goods and services provided therefore an expansionary fiscal policy will stimulate the much needed demand and these continued low levels of inflation are an indication of the need of such an initiation.

The question that then is worrying is, where will government get the money to inject into the economy?

This is the question that only the Minister of Finance and Economic Development will answer on the 19th of December, a day which most traders and economic stake holders are anticipating for so as to determine the direction of the economy next year.
- bh24