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‘Govt must stimulate domestic demand’

ZIMBABWE’S persistent deflationary environment is seen forcing Reserve Bank of Zimbabwe (RBZ) governor John Mangudya to take an inflation-oriented stance in his monetary policy statement that is due early this year.


Leading UK based research unit NKC African Economics (NKC) said the country has no choice but to tackle deflation given that it is detrimental to productive sectors of the economy, consequently reducing economic growth.

“The country still faces a liquidity crunch due to cash shortages, which is depressing aggregate demand. In the wake of deflation being around for more than a year and continued business shutdowns, we expect the RBZ to introduce an inflation-oriented policy at its next monetary policy presentation,” said NKC in a commentary on Zimbabwe’s latest inflation figures for the month of December 2015.


However, former Economic Planning minister Tapiwa Mashakada said NKC’s argument could mislead the nation as inflation adjusted and targeted policies will not work in Zimbabwe given the prevailing distortions.

“It’s a great contradiction because it’s not a mechanical process of switching from deflation to inflation, it has to do with fundamentals which are basically misaligned,” said Mashakada.

“One of the problems is that there is no fiscal space and the economy is shrinking with low aggregate demand. For the economy to grow, it needs spending at household and government level. The fact that there is deflation means the group used to calculate the weights for inflation is just not spending as much.” This comes after the Zimbabwe National Statistics Agency (Zimstat) released figures showing that the country’s year-on-year inflation rate for the month of December 2015 as measured by the all items Consumer Price Index (CPI) stood at -2,47%, shedding 0,01 percentage points on the November 2015 rate of -2,46%.

This, Zimstat said, means prices as measured by the all items CPI decreased by an average of -2,47 percentage points between December 2014 and December 2015.

The year-on-year Food and Non Alcoholic beverages inflation prone to transitory shocks stood at -3,71 % whilst the Non-food inflation rate was -1,89 %.

Zimstat said the month-on-month inflation rate in December 2015 was -0.11% shedding 0,27 percentage points on the November 2015 rate of 0,16%.

This means prices as measured by the all items CPI decreased at an average rate of -0,11% from November 2015 to December 2015. NKC said the trade sub-index has been increasingly driving deflationary pressure, suggesting a pass-through from the depreciating South African rand against the US dollar, which is widely used in Zimbabwe.

“The rand weakened by 7,2% during the course of December. According to ZimStat, the country’s imports are mainly from South Africa and accounted for 38,19% of the import bill in the third quarter of 2015,” said NKC.

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