HomeAnalysisDeflationary pressures ebb

Deflationary pressures ebb

According to latest ZimStat inflation numbers, annual inflation rose by 0,33 percentage points from -0,69% in May 2016 to -1,37% in June 2016, fuelled by inflationary pressures from food, gas and liquid fuels, and health and education categories, amongst others. The underlying month-on-month inflation also increased by 0,43 percentage points to 0,19% in June 2016, compared to -0,24% in May 2016. Generally, inflation has remained in the deflation zone on account of appreciating US dollar and weak domestic demand. The persistently weak South African rand was also contributing immensely to the deflationary pressures. South Africa is Zimbabwe’s largest trading partner and the nation imports almost all of its basic needs and industrial items from South Africa. As such, a weaker rand entails low or even zero imported inflation, thereby contributing to deflation in the economy.

Shingai Moyo

The decline in value of the Rand may be just a short-term aberration which we might regret considering the opportunities we have thrown out had we allowed it to remain in circulation.
The decline in value of the Rand may be just a short-term aberration which we might regret considering the opportunities we have thrown out had we allowed it to remain in circulation.

Volatility of the South African rand is also of major concern to Zimbabwe’s economy. In the first quarter of the year, the rand registered a very strong performance against the US dollar but was highly volatile in the second quarter of the year due to heightened global risks. For instance, the Britons vote to leave the European Union termed “Brexit” spread chaos through global markets, given slowing demand from China and flat commodity prices. The South African rand was highly vulnerable as Britain is the fourth largest exports destination for South Africa and globally, investors feared that trade between the two countries may be hurt. Such shocks in South Africa definitely have direct or indirect impact on Zimbabwe economy and price stability.

However, as the Brexit tempers and fears cooled down, the rand recouped some of its losses alongside as investors expected leading central banks to keep rates low to minimise the damage to the global economy after Brexit. Lower rates by leading central banks such as the Fed Reserve, Bank of England and European Central Bank may reignite investor appetite for risk assets such as emerging markets – where South Africa is classified – and therefore providing strong support to their currencies. If this happens, the rand is expected to either stabilise at current levels or slightly appreciate.

Ideally, in respect to the Zimbabwean economy, strengthening of the rand will be good and positive as it may support export competitiveness, while on the other hand reversing the deflationary pressures in the economy. The current deflationary pressures and liquidity challenges are more a result of loss in export competitiveness and weaker South African rand. A stronger US dollar or weaker South African rand has significantly undermined local exporters’viability and local manufacturers who are facing stiff competition from South African products. The Reserve Bank of Zimbabweis trying to intervene by introducing export incentives using the controversial bond notes. Although the measure is being met with great suspicion as the markets fear the return of the defunct Zimbabwe dollar, in the short run it may assist the nation as it promotes export competitiveness and help alleviate current cash crisis.

Deflationary pressures may also cool down as a result of contentious the amended Statutory Instrument (SI) 64 of 2016 which removed goods that are locally available from Open General Import Licence exemption. However, the measure was met with fierce resistance, particularly by the individual traders, forcing government to relax the regulation on individuals. The measure was meant to protect the fragile local industry whose viability has been threatened by influx of imports. In the past two years, import restrictions on cooking oil, milk, poultry, clothing and milling industries showed some positive results, although the measures are contestable and a double-edged sword in some cases.

Going forward, the current deflationary environment is expected to slowly dissipate and mild inflationary pressures to kick-in due to the anticipated inflationary pressures largely emanating from drought-induced higher food prices, effects of import restrictions and the anticipated strengthening or stabilisation of the South African rand against the US dollar.

Moyo is an economic and financial consultant. He writes in his personal capacity.

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