via Zimbabwe inflation to remain very low – IMF July 14, 2014 by Victoria Mtomba
THE International Monetary Fund (IMF) projects Zimbabwe’s inflation to remain low at 0,2% due to falling prices but warned that deflation would also haunt the country.
Deflation occurs when there is a decrease in the general price level of goods and services and happens when the inflation rate falls below 0%.
In a report after the annual Article IV consultation, IMF said Zimbabwe’s 12 month inflation rate decelerated to 0,3% in April 2014 from 2,9% at the end of 2012 due to the weak aggregate demand.
Zimbabwe has maintained a single digit inflation figure since 2009.
“Inflation is projected to remain very low during 2014 (0,2 %), peaking up to 1,2 % in 2015,” the IMF said.
IMF said a closer look at the Consumer Price Index components showed that deflationary pressures have been stronger in traded sectors suggesting that pass-through from a depreciating Rand also played an important role.
“On the upside temporarily falling prices benefit consumers with job security. By delivering a boost to aggregate demand, falling prices may contribute to eroding the country’s negative output. Deflation could also correct the existing overvaluation in the real exchange although that would require a process of non-traded inputs and final goods to fall faster that the prices of traded goods which has been the case so far,” IMF said.
It said deflation may increase the burden of existing debt in the country which was already under financial stress. Zimbabwe’s both domestic and external debt now stands at $9,9 billion according to official statistics.
The country owes creditors that include the IMF, World Bank and the Paris Club among others.
The Bretton Woods institution said deflation would hurt producers and might reduce the country’s capacity to produce as it leads to widespread company downsizing and closures due to downward wage rigidity.
Zimbabwe first registered deflation this year in February of -0,49 since the use of the multi-currency regime in 2009.
In March, the deflation figure widened to -0,91%. It was -0,26% in April and -0,19% in May.
IMF, however, projects growth to be sluggish over the short to medium term as a comprehensive and determined reform programme would be necessary to foster foreign investments and boost productivity
“Given the weak momentum coming out of 2013, it is hard to see a vigorous economic recovery in 2014. Agricultural and mining exports are projected to accelerate in 2014, due to another strong tobacco season and increased output of gold and platinum. This will offset the continued shrinking of the industrial sector, under pressure from competing imports from South Africa,” IMF said.
IMF said the current account balance should improve over the medium term as export capacity increased, but the current account deficit was expected to remain high, averaging around 15% of GDP in the medium term.
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