Zimbabwe’s inflation shows ominous signs of slowing economy

via News Analysis: Zimbabwe’s inflation shows ominous signs of slowing economy – Xinhua 2013-12-17

Zimbabwe’s inflation continued on a downward spiral this year, raising fears of an economic stagnation, economists say.

Figures released by the Zimbabwe National Statistical Agency (Zimstat) on Monday showed that the annual inflation rate had declined from 0.59 percent in October to 0.54 percent in November.

The annual inflation had been dropping from 2.5 percent in January this year.

Zimbabwe has been experiencing low levels of inflation following the adoption of multiple currencies in 2009, but a sharp decrease in the rate over the past 11 months has raised fears of economic stagnation.

Independent economist Farai Zizhou told Xinhua that while low inflation levels were a welcome development for a country that once experienced hyperinflation, the continuous decline could, in fact, be a sign of a very bad economic outlook.

The low inflation levels, he said, were a reflection of very little liquidity in the economy and weak aggregate demand in the economy.

“There isn’t a lot of money around and that tends to depress demand for goods and services,” Zizhou said.

He said the scenario could lead to serious lowering of interest rates and when both inflation and interest rates are low, the end result was negative savings.

In the long run if interest rates were not attractive for people to put their money into banks then there would be no money available for investment.

A Zimstat official who declined to be named, however, said the country was not experiencing deflation.

Zimbabwe experienced a decade-old economic turmoil starting from the late 1990s, with gross domestic product shrinking about 50 percent from 1995 to 2008. A hyper-inflation crashed the local currency Zimbabwean dollar.

The economy crawled back to life after the country’s major political parties formed an inclusive government and began using the U.S. dollar as the main currency in 2009. In July, the country’s veteran leader Robert Mugabe and his Zanu-PF party won the elections to rule for the next five years, kicking opposition parties especially the Movement for Democratic Change led by labor union leader Morgan Tsvangirai out of the government.

There are fears that the economy under the watch of Zanu-PF, the sole ruling party from 1980 to 2009, might not perform well.

Economist David Mupamhadzi said the low inflation was an indication of serious fundamental problems in the economy.

“It’s a worrying trend that we are seeing on the inflation front. It is because of weak demand in the economy, the current liquidity crisis and the general lack of confidence in the economy which is also affecting overall aggregate demand in the market,” he said.

He said the government needed to create confidence in the economy so that companies can enhance viability and start to produce and employ more people.

Zimbabwean banks are grappling with a serious liquidity crisis that has seen most banks failing to meet demand for cash. Riot erupted on Monday at a branch of Allied Bank in Harare as depositors failed to withdraw money as the Christmas shopping geared to its peak.

Economy topped the agenda of the ruling party’s annual congress that ended last weekend.

The ruling party has mapped out an economic blueprint that aims to boost economic growth rate from 3.4 percent in 2013 to 9 percent in 2018 when President Mugabe ends his five-year mandate. The government says it will prioritize food security and nutrition; social services and poverty reduction; infrastructure and utilities; and value addition and beneficiation.