Editorial Comment – Economy: Hope springs eternal

By IAfrica
In Zimbabwe
Aug 16th, 2014
0 Comments
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zimplogoZIMBABWE’S annual inflation turned positive in July for the first time in five months after gaining 0,39 percentage points to 0,31 percent from 0,08 percent.
Inflation was last positive in January at 0,4 percent. However, there is very little to celebrate about the inflation rate moving out of negative territory. This is likely to be short term because there has not been much change in the structural drivers of inflation especially on the external sector. With the country continuing to rely on imports even for basics such as okra, baked beans and other small items, it will be difficult for the domestic policies to rein in inflation. Developments especially in South Africa will continue to determine the inflation rate here in the short to medium term especially the volatility of the rand, this is why the food and non-alcoholic beverages inflation remained in the negative.

A lot of arguments have been put forward on what the country is experiencing, with most leaning towards deflation. Our opinion is that the country has been experiencing negative inflation as opposed to deflation as the former has little to no effect on prices, only the amount of money that is available to purchase those products. However, economists emphasise that both negative inflation and deflation are two phases of a single economic phenomenon rather than two distinct events that occur as a logical movement within an economy.

Generally, aggregate demand remains weak with consumers now directing most of their spending dollars to immediate necessities. The liquidity situation has remained dire although tobacco inflows had helped to boost money supply.

George Guvamatanga (Barclays managing director) and FBC chief executive John Mushayavanhu rightly said that we are going through a price correction rather than deflation. People just do not know the value of the US$ and this in a way has killed the economy.

The IMF in its latest report on Zimbabwe, says the country is likely to come out of deflation by year end with inflation rising to 1,2 percent in January 2015. The IMF, however, says deflation could also correct the existing overvaluation in the real exchange rate, although that would require prices of non-traded inputs (notably labour) and final goods to fall faster than the prices of traded goods, which has not been the case so far. (Also), falling prices boost real money supply and could alleviate somewhat the persistent liquidity shortages.

“In the near term, in the absence of monetary policy tools, the authorities must avoid exacerbating the distortions and imbalances, for example, by resisting the impulse to restrict imports and by avoiding further public sector wage increases, which put pressure on salary negotiations elsewhere in the economy,” says the IMF

To put things into perspective, there is need for both policymakers and the populace at large to understand the type of inflation prevailing. Such an analysis is more useful in the formulation of realistic solutions to eliminate or at least reduce this monster. Zimbabwe is faced with an aggregate demand deflation. This has been caused by the prevailing liquidity crunch gradually leading to the weakening of aggregate demand principally witnessed from mid-2011 to date. Virtually all sectors in the economy began to record slowdowns in their revenue and profitability growth prospects.

Company closures, downsizing and retrenchments followed thereafter with disposable incomes initially stagnating and eventually declining. This subsequent decline forced consumers to shift their tastes and preferences’ towards basics compared to luxury goods. Overall, demand declined and most corporates in an endeavour to stay afloat at reduced profits were forced to reduce prices yet still demand remained weak. Rand weakness also put pressure on prices as Zimbabwe is a net importer for both basic and capital goods. The decrepit state of the local manufacturing sector and high utility costs also aggravated the scenario.

Deflation, disinflation just like inflation simply is a symptom of the underlying causes within an economy. Seeing the vicious cycle which is now visible through company closures, declining disposable incomes leading to low demand which then forces downsizing by corporates, policymakers need to step up their efforts in finding a lasting solution. While most economic indicators and pessimists are pointing gloom and doom due to lack of a printing press, all hope is not lost for the nation.

Structural reforms that improve the business environment and stimulate domestic and foreign investment could offset the deflationary impulse.

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