Zimbabwe’s low inflation a curse

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Disinflation and possible deflation appear to be the greatest threat for 2014 at a global macro-economic level.

The euro area is reported to be experiencing worryingly low inflation levels of below 1% which has been viewed as signalling a potential deflation threat. In the US and Canada, the respective inflation rates are reported to be way below their central banks’ target of 2%. The International Monetary Fund (IMF) chief, Christine Lagarde, in January 2014 said; “…we see rising risks of deflation, which could prove disastrous for global economic recovery. Deflation is the ogre that must be fought decisively.”

These comments by the IMF chief and other economists emanated from the weaker growth that is being experienced in emerging market economies. Emerging market economies account for an estimated 40% of the global gross domestic product. Weaker growth in these economies may also unleash further low prices for the global economy as aggregate demand fades.

The local economy has also been witnessing low inflation as in advanced economies. This makes economic sense as the US dollar is the major currency locally. Similar to emerging markets, domestic demand has also been slowing down. Against this background, economic agents must not be surprised by the low inflation levels in the economy.

Zimbabwe National Statistical Agency (ZimStat) recently announced that annual inflation shed 0,90 percentage points to minus 0,49% in February compared to prior months’ 0,41%. Weakness in aggregate demand emanating from tight liquidity and persistent rand weakness remained the major factors for the inflation decline.

Whilst the validity and accuracy of these figures is debatable which could be a different subject on its own, certain issues need to be addressed. Is Zimbabwe officially in deflation or is it still in disinflation? Is Zimbabwe benefitting from the low inflation? Which tools are at the disposal of policymakers to address the situation?

Deflation by definition refers to a decrease in the general price level of goods and services due to a fall in effective demand. It is said to occur when the inflation rate falls below 0% (a negative inflation rate). Disinflation on the other hand refers to the slow-down in the inflation rate. This is what has been experienced between August 2013 and January 2014 in the local economy.

For now it is too early to tell whether Zimbabwe is now in a deflationary period. This is so as the trend of negative inflation has not yet been established. Inflation figures for the next three or so months will be critical in affirming whether Zimbabwe is now in deflation or not.

Economic agents should thus regard the current environment as disinflation as this trend has been proved since December 2011 through declining annual inflation figures.

Low inflation has its own advantages and disadvantages. For instance, low inflation normally reflects general price stability which is a requirement by most governments in promoting economic growth.

Whilst this may be true, the key question to address relates to whether low inflation levels are as a result of sound economic policies or just a symptom of a disease. For our economy, the low inflation reflects a bigger problem entrenched in the economy. This is because it has been due to tight liquidity conditions which have led to a decline in demand for most products and services.

Also, company closures, low profitability and losses, declining or sticky disposable incomes and retrenchments have also resulted from the liquidity monster.

Thus the low inflation signals a bigger problem for Zimbabwe and is one of the reasons why economic growth has been contracting between 2012 and 2013.

Most economies use monetary and fiscal tools to address inflation and economic growth issues. Policymakers locally cannot make use of monetary tools such as printing money or altering interest rates due to the use of a non-sovereign currency.

As explained in the last paragraph since inflation is just a symptom, policymakers need to address the real problem, which is how to stimulate economic activity.

There is need for the government to craft policies that attract foreign capital which can come in the form of aid, credit lines, foreign direct investments and portfolio investments. This is key as Zimbabwe is thirsty for capital in almost all sectors.

The coming in of capital will thus alleviate the liquidity squeeze being experienced in the economy whilst at the same time reviving local industries through increased investment. Worth noting is that Zimbabwe boast of attractive investment projects notably in mining and agriculture.

These projects assuming the business environment improves particularly on economic enablers such as utilities and recovery of commodity prices may subsequently lead to positive flows assisting the balance of trade.

Overall foreign capital and an increase in investment are the major sources for stimulating economic activity in the economy.

Absence of these two possibly means consumption levels will remain depressed and government revenue. Overall, considering the relatively low inflation levels, policymakers may need to focus on stimulating economic activity lest the whole economy will be placed under care and maintenance.

 

One thought on “Zimbabwe’s low inflation a curse”

  1. Sirius says:

    Zim is in disinflation. There are no low prices at all. Just a slow growth in economic activity!

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