Zim deflation breaks records

Source: Zim deflation breaks records – DailyNews Live 19 January 2017

HARARE – Zimbabwe has remained in deflation for the past two years despite
government’s effort to stimulate local production, latest figures show.

Data released yesterday by the Zimbabwe Statistical Agency (Zimstat)
revealed that the country’s year-on-year inflation gained 0,16 percentage
points in December 2016 to close the year at -0,93 percent.

“This means that prices as measured by the all items Consumer Price Index
decreased by an average of -0,93 percentage points between December 2015
and December 2016,” Zimstat said.

Market experts, however, said the country, which entered into full blown
deflation in October 2014, is expected to struggle with negative inflation
for the foreseeable future as demand shrinks and cash-strapped companies
lay off staff or stop paying wages.

“The supply of dollars in Zimbabwe is limited and their velocity of
circulation is low. The result is that prices are falling and economic
activity is stagnant,” Rhodes University researcher Gavin Keeton said.

Like Britain, Japan, the United States and other nations dealing with the
consequences of weak

demand and low metal prices, Zimbabwe is menaced more by the prospect of
falling prices than by rising ones.

The country stopped printing the Zimbabwe dollar in 2009 and moved to a
hard-currency regime as a way of dealing with hyperinflation, which
reached a peak of 231 million percent in August 2008.

Having swapped the world’s weakest currency for its strongest, Zimbabwe
begun to import deflation.

The prices of goods trucked across the border from South Africa, where the
rand has plunged significantly against the dollar in a year, have fallen.

Keeton noted that the weakening of the South African rand against the
greenback will compound Zimbabwe’s deflationary woes.

“Neither of the traditional tools for economic stimulus – monetary policy
(interest rates) and fiscal policy (government spending and taxes) – are
available to the Zimbabwean government.

“The weakness of the banking system renders monetary policy ineffective.
And as the government is already struggling to pay its wage bill, it
cannot increase spending or cut taxes,” he added.

Economic analyst Francis Mukora said to increase the available dollar
supply, Zimbabwe needs to export more than it imports, or attract foreign

“A trade surplus is unlikely when domestic production is so weak and the
dollar is strengthening so rapidly against the rand. Attracting capital
inflows requires policy changes that are politically unacceptable,” he

Finance minister Patrick Chinamasa said the decline in domestic prices
during 2016 was driven by a combination of continued weakening in domestic
demand, depreciation of the South African rand against the United States
dollar, and subdued international oil prices.

“On balance, marginal deflation is expected in 2017, with prices
responding to the anticipated improved level of domestic production and,
hence, the prevailing liquidity situation in the country,” he said.