20 June 2014

Zimbabwe: Govt Faces Uphill Task to Deal With Deflation

THE ZIMBABWEAN government faces an uphill task in dealing with deflation and its negative effects on an already struggling economy in the absence of new capital inflow, a local economist has said.

Banker and financial advisor Clive Mphambela recently warned deflation could impair the ability of borrowers to repay loans, increase vulnerabilities and sharply reduce bank earnings.

Although economists argue whether or not Zimbabwe's current situation is price correction or deflation, signs point to a deflationary environment, local economist Moses Chundu says.

"Our fear is indeed it is deflation which it looks like and correcting deflation is very difficult," said Chundu in an interview with businessdigest on Tuesday.

"Hyperinflation is easy because you just start the printing press and everything falls in place. With deflation the opposite is true, but not in this case because you can't print the US dollar and you have no monetary policy management instruments."

The economists said Zimbabwe needed means to quick start the economy using shockers such as increasing public expenditure.

"But how do you improve public expenditure when you cannot control the printing press?" Chundu said.

This, Chundu said, only leaves Zimbabwe with an option to get external capital injection which currently is not an easy task given the negative impact of the indigenisation policy, as well as the general lack of policy consistency and the country's poor economic ratings.

"Either we print with all the challenges to do with credibility or we play well with our friends to inject, but it's a difficult task to correct. Everyone must come to the table; this government cannot correct a deflationary environment alone," he said.

Economist Godfrey Kanyenze said deflation was merely a sign of lack of economic activity.

"The cake is shrinking, meaning there is less to redistribute because there is just no productivity," Kanyenze said.

The comments came after latest Zimbabwe National Statistics Agency (Zimstat) figures show the country has been in deflation for four consecutive months.

According to Zimstat, the country's year-on-year inflation rate for the month of May 2014 as measured by the all items consumer price index stood at -0,19 %, gaining 0, 07 percentage points on the April 2014 rate of -0,26 %.

This means that prices as measured by the all items consumer price index decreased by an average of 0,19 percentage points between May 2013 and May 2014.

Zimstats said the year on year food and non alcoholic beverages inflation prone to transitory shocks stood at -3,75 % whilst the non-food inflation rate was 1,62 %. On a month-on-month basis, the inflation rate in May 2014 was -0,13 % shedding 0, 71 percentage points on the April 2014 rate of 0,58 %, meaning as measured by the all items consumer price index decreased at an average rate of 0,13% from April 2014 to May 2014.

"The month-on-month food and non alcoholic beverages inflation stood at -0, 30 % in May 2014, gaining 0, 16 percentage points on the April 2014 rate of -0,46 %,' Zimstat said in a statement.

"The month on month non-food inflation stood at -0,05 %, shedding -1, 14 percentage points on the April 2014 rate of 1, 09 %."

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