14 January 2014

Zimbabwe: Economy Heads for Deflation Point, Says Economist

ZIMBABWE'S economy will hit the deflation point next month if the current downward trend in inflation continues, a leading economist said yesterday.

Deflation occurs when the inflation rate reaches below zero percent.

The economy recorded sustained disinflation towards the end of 2013, with the annual year on year inflation closing the month of November at 0,54 percent.

The Zimbabwe National Statistics Agency is due to release December inflation statistics this week.

Economist Mr Joseph Mverecha told a post Budget meeting for members of Parliament that the downward trend in inflation was likely to persist.

"By February, year on year inflation will be negative," he said. "It might remain so until May or June.

Mr Mverecha said it was "very difficult" for a country to come out of deflation, pointing to Japan which has over the past decade struggled to get to the inflation level.

He said deflation has serious negative impact across the economy. "Deflation always impacts severely on the poor."

Major impacts will be on prices and stability of the financial sector, he added.

Zimbabwe successfully dealt with hyper-inflation which had ravaged the economy in the past 10 years by abandoning its local currency and adopting a basket of multi-currencies anchored by the United States dollar.

At the last official count which was its peak, inflation topped 231 million percent in June 2008 and six years down the line, the economy is on the verge of deflation.

A number of factors primarily driven by a tight and sustained liquidity crunch over the past few years have continued to push the country's inflation downwards.

Aggregate consumer demand has declined as purchasing power has been eroded owing to failure by the Government and most employers to award workers salaries and wages in line with the cost of living.

At the same time, productivity in local industry continues to slump due to a cocktail of factors to do with unavailability of working capital.

"A lot of fresh capital is required to address most of these challenges," Mr Mverecha said.

He bemoaned absence of support from multi-lateral finance institutions and donors.

"Unlike many countries in the Southern African Development Community, much of our funding is internal," he said.

Mr Mverecha said it was critical that the government addresses the underlying core problems and not the "symptoms" in the economy if the trend is to be reversed.

"We need to make a correct diagnosis of the challenges we are facing," Mr Mverecha told the Parliamentarians.

"We also need a commitment to deal with the core structural challenges and not the symptoms."  New Ziana

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