Zim to remain in deflation: WB

via Zim to remain in deflation: WB – DailyNews Live John Kachembere • 13 April 2016

HARARE – The World Bank says Zimbabwe will remain in deflation this year due to low aggregate demand in the country.

In its World Economic Outlook report released yesterday, the Bretton Woods institution noted that the country, which is facing one of its worst droughts in 20 years due to El Nino, will record negative inflation of 1,2 percent this year before peaking up to 1,2 percent in 2017 and 2,0 percent in 2021.

Like Britain, Japan, the United States (US) and other nations dealing with the consequences of weak demand and cheap oil, Zimbabwe has been menaced more by the prospect of falling prices since March 2014.

Market watchers believe that the country — once gripped by the madness of hyperinflation that reached a peak of 231 million percent in August 2008 — could wallop in deflation for the coming two years as demand shrinks and cash-strapped companies lay off staff or stop paying wages.

Zimbabwe quit printing the local currency in 2009 after it had been rendered worthless by hyperinflation and moved to a hard-currency regime dominated by the greenback.

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

The prices of goods trucked across the border from South Africa, where the rand has plunged by nearly a third against the dollar in a year, have swooned.

Leading Oxford University-owned research unit, NKC African Economics (NKC), recently warned that the country’s inability to control deflation was damaging to the economy in the medium-to-long term.

“Irrespective of the many positive steps seen over the past two years in Zimbabwe’s monetary sphere, the inability to curb deflation — in the absence of a sovereign currency and benchmark interest rates — is to the detriment of Zimbabwe’s medium-to-long-term economic growth potential by eating into its productive sector,” NKC said in its commentary on Zimbabwe’s economic performance.

“As commented before, declining consumer prices — associated with the strength of the US dollar against the South African rand as well as slack domestic demand — is having an adverse impact on local productive capacity,” said the research unit.

NKC added that Zimbabwean companies producing food and consumer goods are having a tough time competing with cheaper imports from South Africa despite protectionist measures helping them.

However, economist Persistence Gwanyanya believes that the current low prices could be a result of internal adjustment necessary to restore or improve competitiveness in a country that has no autonomy over its exchange rate policy.

“Deflation could also be a result of pass-through effects of lower prices obtaining on imports from countries facing currency depreciation and thus could ease the pressure on cost of living while also facilitating recapitalisation by industry in Zimbabwe,” he said.