Zimbabwe enters deflation

Zimbabwe enters deflation
Published: 18 March 2014
Zimbabwe moved into deflation after the annual rate of inflation for February shed 0,90 percentage points to minus 0,49 percent due to continuing price fall with some economists seeing this as a temporal phase of price self correction.

The Zimbabwe National Statistical Agency said on Friday that prices as measured by the consumer price index decreased by an average 0,49 percent in the 12 months to February 2014.

"The year-on-year inflation rate for the month of February 2014, as measured by the all items consumer price index stood at minus 0,49 percent, shedding 0,9 percentage points on the February 2013 rate of 0,41 percent," said ZimStat.

Inflation rate refers to the magnitude of increase in prices over a given period usually measured over a period of 12 months while deflation occurs when the inflation rate falls below zero.

Zimbabwe has now experienced both extreme ends of the inflation continuum, after inflation peaked at 231 percent at the last official count in August 2008 and started at an all-time low of minus 7,7 percent in 2009 after the country dollarised.

While the country has, technically, descended into deflation, some economists believe it is a temporal period of gradual climb down from dollar-induced inflation the economy went through after adopting multi-currencies in 2009.

Harare-based economist Mr Witness Chinyama said the deflation was only a period of price self correction as people quoted high prices due to the Zimbabwe dollar mentality stemming from the era of the decade-long hyperinflation.

"Remember we had periods such as the diamond rush when the US dollar was easy to find, during that period, we had some US dollar (induced) inflation," Mr Chinyama said.

"Even for a (simple) car, one would say I want $15 000," he said.

Corporates and individuals, usually quoted steep dollar prices, which is what they were used to in the hyperinflationary era, seeking high margins from few items instead of pushing volumes in order to maximise their returns.

It is no wonder that a (US) 3 cents increase in, say the price of fuel, jerks no-one in Zimbabwe yet in neighbouring South Africa such an increase, in rand terms, sparks national outcry. It shows the extent to which the strength of the dollar is underestimated.

"We have many people holding on to assets they cannot sell and prices have to come down until they match the stock of money we have in the economy," Mr Chinyama said.
"The low salaries people talk about are not really very low, prices were too high and as prices come down things will even out."

Mr Chinyama pointed out that the fall in prices will continue until there is no longer price arbitrage or price advantage between imported goods and those manufactured locally.

He said that the deflation in Zimbabwe was different from the other forms of common deflation normally associated with serious monetary or structural economic problems.
Normally, deflation heralds a situation where prices fall as sellers of goods sacrifice profits to keep afloat when aggregate demand falls owing to weakening purchasing power.

Deflation refers to a general decline in prices, often caused by a slowdown in supply of money or credit in an economy. An economy enters deflation when inflation falls below zero.

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling prices, profits, closing of factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals alike.

Zimbabwe is facing tight liquidity since dollarisation of the economy in 2009 after scrapping its own currency due to hyperinflation.

Many companies have found it difficult to access funding to support operations and replace old equipment to enhance efficiency and competitiveness against imported products.

Generally, it is cheaper to import than to buy local goods due to the high cost of manufacturing owing to high-priced power, labour, inputs, water and old machinery among others.

This has constrained their capacity to generate revenue and pay living wages to workers in a development that has negatively affected consumers' capacity to buy goods and services.

The liquidity situation is compounded by the fact that the Reserve Bank of Zimbabwe, which is not printing money, has no capacity to influence money supply.

As such, the monetary instrument cannot be used to correct the situation.

Another economist who requested anonymity said while deflation was not a major problem in the short term, it was a major concern going forward as it would result in loss of jobs because when people do not consume, they do not get cash.

If prices keep falling, it also means that retailers would be forced to sell goods at prices lower than the cost of procurement, which diminishes profits leading to company closures.

"At this point it is not a serious threat and we need to understand fundamentals and whether this is short-or long-term. In the long run this becomes a problem," the economist said.

"The root cause of this is low aggregate demand. It is an indication that people are not consuming. If you do not have (strong) aggregate demand, the economy does not grow," he said

The economist said deflation is a symptom of a problem because it is an indication that people are not spending much. The country started in deflation in 2009 as the economy had a negative inflation rate of 7,7 percent in December 2009.

This was hardly surprising as the market self-adjusted prices after the introduction of a more stable currency.

Ostensibly, if the fall in prices of goods and services was due to the equalisation process, it means it did not come full circle.

Annual inflation fell by 2,1 percentage points over a year after a downward trend since 2012 with the last half of 2013 taking a significant knock from an inflation rate of 1,87 percent in June 2013 to 0,33 percent at the end of the year.

Economist Mr Joseph Mverecha had earlier in January told a post budget meeting for Members of Parliament that the disinflation (inflation decline) was likely to persist until deflation.

He said: "It might remain so until May or June.

"It was very difficult for a country to come out of deflation, pointing to Japan which has over the past decade struggled to get wade out of deflation to inflation level."

He said deflation has negative impact across the economy.

"Deflation always impacts severely on the poor." Major impacts will be on prices and stability of the financial sector.

At the same time, productivity in local industry continues to slump due to a cocktail of factors to do with unavailability of working capital. "A lot of fresh capital is required to address most of these challenges," Mr Mverecha said.
- The Herald


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