Deflationary conditions to persist into next year

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THE country’s year-on-year inflation improved to -1,33% in September from -1,43% in August due to increases in prices of basic commodities.

Financial Matters with Shingai Moyo

Foreign payments gridlocks and Statutory Instrument 64, which restricted the importation of some commodities, created shortages of some basic commodities, resulting in upward tick in prices. However, deflationary pressures are expected to persist as outflows of dollars continue to constrain money supply. Although the anticipated increase in energy prices may provide support to price increases, they are not enough to ward off deflationary pressures. The economy will struggle to escape these ongoing deflationary conditions as the supply of money in circulation continues to fall.

The current deflationary conditions were reportedly attributed to rand weaknesses. Almost 40% of imports come from South Africa and the rand weakness was, among other factors, a major contributor to Zimbabwe’s deflation.

However, the rand has shown some strength against the US dollar, gaining 12% year-to-date. Surprisingly, its strength has been insufficient to trigger price growth in Zimbabwe. This suggests that the main constraint to inflation or contributor to deflation is a falling supply of money in the economy, not the rand and it will continue to impose more deflationary pressures over 2016 and 2017.

Falling supply of money circulating in the economy is a result of wider liquidity and cash problems which can be traced as far back as March 2012 when the Reserve Bank of Zimbabwe (RBZ) first implemented controls on banks’ nostro accounts. Prior to 2012, banks used to freely import cash, a position that has since changed as a result of Reserve Bank of Zimbabwe regulations.

Cash has also been on the list of foreign assets running out of the economy due to a perennial trade deficit, insufficient flows of inward investment and externalisation, leaving a severe shortage of liquidity. The situation, going into 2017, may be exacerbated by elevated levels of political risk as the nation prepares for the 2018 general elections. Capital will continue to leave the country as investors develop cold feet due to political risk, and remain unwilling to finance the country’s trade balance, sustaining deflationary pressures over this period.

Questions surrounding President Robert Mugabe’s succession will also continue to derail investor confidence, limiting inward cash flows. Without foreign assistance in the form of a cash package from multilateral institutions such as International Monetary Fund (IMF) and World Bank, the country may be locked in this deflationary condition for longer.

Any government efforts to restore liquidity and cash in the economy are likely to fail over the next two years. Despite government efforts, there is a timing problem. For example, the government cleared its US$107,9 million arrears with the IMF. This is a first step in clearing long-standing arrears with multilateral lenders in the hopes of restoration of lines of concessional credit.

Although the nation has now met all its financial obligations to the IMF, it is required to clear another US$1,6 billion in arrears with the World Bank and the African Development Bank (AfDB) before any new credit facility can be arranged. Given the sorry state of government coffers and the difficulty it took to clear the first tranche, it is highly unlikely that the government will be able to clear the World Bank and AfDB arrears, denying the country a potential source of real cash. Only new capital and cash injection may take the country out of the deflationary conditions.

The RBZ’s soon-to-be-introduced bond notes may fail to have any impact on inflation, given the negative sentiments surrounding them. The government has been accused of, and legally challenged, for attempting to reintroduce a local currency via the backdoor through the issuance of these bond notes.

In the event that bond notes are imposed or that the general public has limited options, the economy might have dual prices — that of bond notes and that of real money — making inflation complicated to measure. Currently, some shops offer a premium on plastic money transactions, distorting prices. Chances are high that people will not take these bond notes seriously as a valid legal tender and, as such, are unlikely to alleviate any of the monetary pressures in the economy.

Moyo is an economic and financial consultant.

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