High productivity will stem deflation — RBZ

The Reserve Bank of Zimbabwe (RBZ) says the country should improve productivity to halt negative inflation, since deflation is externally driven.

Source: High productivity will stem deflation — RBZ – NewsDay Zimbabwe September 6, 2016

Zimbabwe has been in negative inflationary mode since November 2014 and annual inflation was-1,60 in July.

In a working paper, An Empirical Examination of the Dynamics of Negative Inflation in Zimbabwe, RBZ said the results from the econometric analysis suggest that about 58% of the variation in the country’s inflation profile was attributed to external factors. It said domestic demand accounted for 6,1% of the variation in inflationbetween 2011 to 2015, while the remainder was attributed to inflation persistence.

“Given that negative inflation is emanating from external factors, the way forward is to improve productivity and boost competitiveness through reducing costs of production. Authorities should aggressively pursue policies that improve the ease of doing business and review regulations that inhibit the attraction of foreign direct investment,” RBZ said.

The working paper said the results suggested that Zimbabwe could also easily get out of the deflationary phase, even without any policy intervention if the South African rand appreciates against the US dollar.

Moreover, given the transitory and volatile nature of external shocks, it is unnecessary for the central bank to take any decisive action on negative inflation arising from transitory shocks, it said.

“It is also important to note that South Africa cannot sustain a depreciated exchange rate forever. Sooner or later, the trend of depreciation of the ZAR/US dollar exchange rate, witnessed in the recent past, will induce inflationary pressures in the South African economy. An increase in inflation in South Africa will offset the exchange rate gain, thereby, exerting inflationary pressure in Zimbabwe given the high pass through of South African prices to domestic prices,” it said.

The domestic industry, RBZ said, should also take advantage of a depressed South African rand to retool, as it is now cheaper to import machinery from the neighbouring country.

“Retooling of the industry would enhance productivity of the local industry. In addition, given that the decline in prices is occasioned by the correction of prices from high levels premised on the legacy of hyperinflation margins, the negative inflation rates may be beneficial to consumers under the multicurrency regime,” RBZ said.

It said while inflation was negative, the prices of non-tradables in Zimbabwe remained high compared to neighbouring and trading partner countries.

A report by the Zimbabwe Economic Policy Analysis Research Unit identified the major cost drivers as electricity, water, transport, trade taxes and lending fees, which were more espensive in Zimbabwe compared to other countries in the region.

Despite the negative inflation, the high price environment may imply that companies may still be productive at current prices, were it not for other structural rigidities and institutional bottlenecks, RBZ said.

High price levels require that authorities focus on reducing the cost of production, in order to improve and restore competitiveness. It recommended that measures must be put in place to restore competitiveness through internal devaluation.

“This may mean that negative inflation may deepen in the short-term. Once the country’s cost structures are re-aligned to regional averages, industry becomes competitive, production increases and prices would begin to respond to economic fundamentals,” the central bank said.

It said government needed to take proactive steps in managing the risks arising from sustained negative inflation, since it has “limited policy options to influence inflation”.

“There is also need to re-align nominal wage levels, with increases tied to productivity gains, taking into account the effect of falling prices,” RBZ said.

COMMENTS

WORDPRESS: 2
  • comment-avatar
    mark longhurst 6 years ago

    from what, with what..you can only get productivity if you are DOING something, the only productivity record is zanooo looting, and now they have destroyed everything what is left….RBZ…..zanu rrrslikers

  • comment-avatar
    R Judd 6 years ago

    Reserve bank is clueless. They have proved it again and again. The only conclusion I can draw from the performance and actions of the reserve bank over the last decades is that it is a criminal front.

    The article above has a very other worldly quality to it, bereft of anything likely to be of use.