Home » Industry » The Infinite Enigma of Zim’s Inflation Fall

FOR the umpteenth time, Zimbabweans have to grapple with the enigmatic issue characterising trends on the inflation front whether the economy is in inflation or deflation. The puzzling phenomenon is as exciting as it is confusing as the scenario does not quite fit in the standard definitions expounded by basic principles of economic reasoning.

Economic analysts say what is beyond doubt though is the fact that the country is experiencing continued decline in inflation, now at sub-zero levels what common economic reasoning would call deflation.

According to Zimbabwe National Statistics Agency’s all items consumer index, the annual inflation rate was at minus 1,28 percent in January 2015 from minus 0,80 in December 2014.

This means that prices fell by an average of 1,28 percent between January 2014 and January 2015. But the sustained decline has puzzled many an economist in the country.

According to Reserve Bank Governor Dr John Mangudya, Zimbabwe’s average inflation, which fell from 3,7 percent in 2012 to 1,6 percent in 2013, declined further to minus 0,2 percent in 2014, reflecting the dampening of inflationary pressures in the economy.

Dr Mangudya reasons that this is on the back of cheaper imports, mainly from South Africa, and limited access to credit lines by key productive sectors of the economy.

“The Reserve Bank’s considered view is that the reduction in the rate of inflation in the national economy was and is a necessary process towards correcting the high prices obtaining in the country,” Dr Mangudya said when he presented his monetary policy statement.

This line of thought raises the question of whether the negative inflation is due to price correction of overpriced goods, weak demand due to low disposable incomes or response to competition from products produced in low- cost jurisdictions locals cannot match.

Two schools of thought have dominated discourse around the country’s inflation trend, especially regarding the periods of its continued decline in the sub-zero region.

The first economic reasoning made has been the assumption that the declining inflation was disinflation the downward adjustment of prices pitched too high at dollarisation in 2009.

It is widely believed that most sellers of goods and services were overpriced as retailers charged exorbitant prices due to the mentality carried over from the era of hyperinflation.

Further, economic analysts claimed that this was also forced by the influx of imports from the region, where prices are lower although this does not talk to the different cost bases.

This line of thought is shared by Harare economic analyst Mr Joseph Sagwati, who propounded that the sustained inflation decline was in fact disinflation – a general fall in prices due to weak demand.

“It is absence of aggregate demand or should we say weak purchasing power. There is limited purchasing power as most people are struggling and reflects in prices, no one is buying,” he said.

The other school of thought reasons in line with the standard technical definition that since inflation has fallen below zero and has sustained the trend, the economy was in deflation.

Deflation occurs when inflation falls below zero as sellers of goods and services lose latitude to raise prices due to weakening demand and resort to cutting prices to move volumes.

Technically, Zimbabwe fits the bill. The rate of inflation remained at a negative 0,8 percent between November and December 2014, falling further into the negative zone in January 2015.

Prior to this, inflation hit negative lows in 2014, at minus 0,5 percent in February, minus 0,9 in March, rising to minus 0,26 percent in April, minus 0,2 percent in May and minus 0,08 percent in June.

The positive gains saw annual inflation hit positive gain by July at 0,3 percent, but quickly falling 0,2 percent in August, 0,1 percent in September, 0 percent in October 2014.

Zimbabwe is not the first country to experience negative inflation as Canada (-17,8%) and US (-15,8%) have experienced worse rates of annual inflation than Zimbabwe.

The similarity, in terms of the technical definition, is that Canada, US and Zimbabwe’s inflations fell below zero, the difference being that unlike the two other countries, Zimbabwe did not have its own currency while its industry did not capacity to produce.

While deflation would leave Canada and US industries with excess capacity and ability to produce at least cost without primarily relying on imports, Zimbabwe has limited production capacity, relies on imports for most goods and the little it produces has no takers.

“But if deflation is manifestation of low and weakening demand with sellers of goods and services cutting prices to stimulate demand, can the same be said about Zimbabwe where low disposable income is also a function of a choking widespread liquidity crisis, other than just weak demand, which may be episodic in stable economies,” said market analyst Jerome Negonde.

Source : The Herald