Zim deflation decelarates

WEAKENING aggregate demand has seen Zimbabwe’s headline deflation for January 2016 further decelerating to 2,2% year-on-year, compared with 2,47% year-on-year (y-o-y) in December as the country remains the only one in the region with negative inflation, figures obtained from statistical agency Zimstat show.

Bernard Mpofu

Experts say this slowdown was driven by the sub-index for communications, where prices decreased by only 0,9% y-o-y in January 2016, compared with a much larger 14,2% y-o-y contraction in December.

Bread

In contrast, deflation in the food and non-alcoholic beverages sub-index accelerated from 3,7% y-o-y in December 2015 to 4% y-o-y in January, suggesting an exchange rate pass-through from the depreciation of the South African rand against the United States dollar, coupled with a decline in global food prices. On a month-on month (m-o-m) basis, the CPI contracted by 0,1% in January, following a 0,11% decrease in December.’

The country’s inflation has remained in the negative territory, with the annual headline inflation decelerating from -1,3% in January 2015 to -3,3% in October 2015 and slightly accelerating to -2,5% in December 2015.

On a monthly basis, the inflation rate was -0,05% from the December 2015 rate of -0,1%.

Analysts say Zimbabwe needs to institute more reforms to stimulate economic activity in the wake of falling commodity prices on the international market and weakening regional currencies.

“Aggregate demand remains depressed as the country looks for solutions to the liquidity problem. In the recent Monetary Policy statement, the central bank commented on the negative effects that deflation is having on the economy and it proposed measures to increase liquidity,” NKC Research said in its recent research note.

“These include increasing foreign investor holdings at the local bourse from 40% to 49%, the upgrading of the Real Time Gross System (RTGS) payment system to handle multiple currencies, and the introduction of an open tender system for selling government securities.
However, we believe the measures are not enough to stimulate aggregate demand. The country needs more foreign funding from multilateral organisations and foreign investors, with the latter dependent on making structural reforms and reducing political risk.”

MMC Capital said : “The persistent negative inflationary mode is underpinned by the continued deflating effects on both food and non-food prices, against the backdrop of waning aggregate demand due to significant externalisation taking place in the country.”

The Reserve Bank of Zimbabwe (RBZ) committed to addressing the negative trajectory through plugging leakages from the economy.

According to the apex bank, individuals and firms externalised approximately US$2 billion in 2015 under donations, investments and account transfers. If corrected, the obtaining liquidity challenges will likely improve.

In his 2016 monetary policy statement, RBZ governor John Mangudya said inflation has remained in the negative territory since the fourth quarter of 2014 reflecting the constraining effect of tight liquidity conditions.

In this regard, annual headline inflation decelerated from -1,3% in January 2015 to a lowest rate of -3,3% in October 2015, before accelerating slightly to -2,5% in December 2015 while annual headline averaged -2,4% for the period January to November 2015.

“The persistent negative inflationary mode is underpinned by the continued deflating effects on both food and non-food prices, against the backdrop of waning aggregate demand due to significant externalisation taking place in the country,” said Mangudya.

Mangudya said the slowdown in food inflation experienced in 2015 was mainly driven by the fall in prices of bread and cereals; meat; vegetables and oils and fats sub-categories.

Other sub-categories that contributed to the decline in food inflation include milk, cheese and eggs; fish and sea food, and non-alcoholic beverages. Regarding non-food inflation, declines in housing, water, electricity, gas and other fuels; furniture, household equipment and maintenance; transport and communication contributed to the negative rate.

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