Inflation points to economic stagnation

ZIMBABWE’s economy is likely to remain on a low growth trajectory as inflation trends point towards deflation and economic slowdown after the annual Consumer Price Index (CPI) for December dipped 0,08 % to 2,91% from the November level of 2,99% as the rate of increase in prices continued to slow down.

Report by Clive Mphambela

University of Zimbabwe Economics Professor Ashok Chakravarti said Zimbabwe’s period of disinflation was likely to continue in 2013.

“Firstly, the consumption basket is outdated and does not take into account real expenditure patterns of consumers that have emerged since dollarisation. For instance, people are spending a lot more on accommodation and education than is reflected in the current inflation figures. They therefore are somewhat erroneous,” said Chakrarvati.

“Secondly, which is slightly more positive, our main trade connection is with South Africa and the Rand has been continuously depreciating against the US dollar, making imports into Zimbabwe cheaper. This has been mainly due to the global economic slowdown that has put pressure on emerging market currencies. The softer rand has resulted in stabilisation of prices in Zimbabwe which are based in US dollars.”

Chakravarti said the third and more important point was when one looked at the big downward revisions of GDP growth figures last year.

He said the dip in Zimbabwe’s inflation was reflective of a huge economic slowdown which has resulted in a drop in effective demand.
“As we speak, a large number of importers and traders are sitting on huge stocks which are now moving slower than they were before,” Chakravarti said.

“Additionally, there is nothing on the horizon indicating that there will be a major change in economic fortunes to reverse the current disinflation trend.”

He said low and declining inflation, whilst indicative of price stability, could be also an indicator of subdued economic activity.
“That is why in Europe, America and Asia, governments are injecting huge amounts of money to reflate their economies. For example, Japan a few days ago unveiled a US$116 billion economic stimulus package in efforts to reverse deflation and prop up its economy. Unfortunately, we do not have the ability or resources to institute such programmes,’’ he said.

Last year, Finance minister Tendai Biti made several downward revisions of both the national budget and GDP growth forecasts on account of poor revenue performance.

Biti revised GDP growth for 2012 downwards to 4,4% from the 5,6% he set during his mid-term fiscal policy review in June after the initial 9,4% forecast, whilst at the same time cutting the 2012 budget from US$4 billion to US$3,6 billion.

Biti said government expenditures for 2013 would be pegged at US$3,8 billion, projecting domestic inflation would remain low at 4,5% in 2013, up from 4% last year.

In December, the Zimbabwe National Statistical Agency (Zimstat), said new weights for the Consumer Price Index would come into effect this month. However, a number of economic analysts have often pointed out that the current methodology of working out the CPI was outdated and did not accurately reflect existing expenditure patterns.