ZIMBABWEAN authorities for a while have made the definition of disinflation so elastic that even at a rate of-0.2% in 2014, they insisted that Zimbabwe was witnessing disinflation or price correction and certainly not deflation.
“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,” the Reserve Bank of Zimbabwe (RBZ) said in its 2015 Monetary Policy Statement released earlier this year.
However, the limits of that elasticity are now being breached, as recent inflation data shows a more entrenched deflationary trend setting in. Surely, the ‘price correction’ narrative being pushed by the Zimbabwean monetary authorities is now a hard sell.
Inflation data for May released by Zimstat highlights that the year-on-year inflation rate given by the all items Consumer Price Index (CPI) stood at -2.70%, a 0.05% drop from the April figure of -2.65%. This trend in falling prices has persisted in Zimbabwe since 2013 when the annual average inflation rate witnessed a sharp decline to 1.6% from 3.7% recorded in the previous year 2012.
Deflation is a sustained decrease in the general price level such that the inflation rate becomes negative whilst disinflation is a reduction in the inflation rate. During disinflation, prices are rising, but at a slower rate.
Falling prices are not always a bad phenomenon, as consumers may benefit from falling prices, especially if they are a result of increased efficiencies. In Zimbabwe however, this is not the case as the falling prices reveal underlying structural weaknesses of the economy underpinned by waning aggregate demand.
Throughout history, there have been similarities in countries that have witnessed deflation and Zimbabwe is no different.
Reduced investment spending by the government has played a part in contributing to the deflationary trend the country is seeing. Government revenues already constrained by a diminishing tax base continue to be gobbled up by employment costs, with data showing that over 80% of state revenues go towards footing the wage bill of Zimbabwe`s 236,000 strong civil service workforce.
Furthermore, the availability of credit in Zimbabwe has been declining as banks have become more cautious in advancing loans following the proliferation of non-performing loans in the banking sector, which has affected their profitability. All these are telling signs of deflation setting in and the inflation outlook remains negative with no evident signs that prices will rise anytime soon.Advertisement
The country`s inflation data shows that contrary to the sugar-coated sentiments from the monetary and fiscal authorities, Zimbabwe`s economy is in dire straits. Effects of slowing down economic activity presently obtaining in the country are now becoming ever so apparently. Consumer aggregate demand continues to be subdued as incomes have remained largely static, and company closures have left a good number of economically active Zimbabweans without employment and a regular income source.
Two of the country`s largest consumer facing corporations Delta Beverages and Econet Wireless Zimbabwe, have directly felt this weakening consumer demand. For the full year to March 2015, Delta – the bottling partner for Coca–Cola in Zimbabwe – recorded a 4% decline in revenue as volumes plummeted.
Addressing analysts in Harare a month ago, Delta Beverages` Finance Director, Matts Valela attributed the drop in earnings to a continued change in the mix from mainstream beer towards low cost and premium brands. He also indicated that the company was witnessing a general volume decline in favour of lower priced products. Earlier this year, Delta had also slashed the recommended retail prices of some of its products by 10c across the board.
Econet Wireless – Zimbabwe`s largest mobile phone company incurred a 41% drop in profits in the last financial year. Voice revenues for the company fell 11% to $582 million and coupled with a decline in SMS, the company`s Average Revenue Per User (ARPU) – a measure used by telephone companies for the income they receive from each customer – also declined to $8.10 from $10.4. These statistics paint a grim picture of the economic realities prevailing in Zimbabwe and give credence to the unpopular argument that as opposed to disinflation, Zimbabwe is in deflation.
Lower global oil prices and a weaker South African rand against the U.S. dollar also have been contributing to declining prices in Zimbabwe (South Africa is Zimbabwe`s largest trading partner). Both food and non-food inflation continue to drive deflation as mobile phone charges, selected food items and fuel prices have come down in the last year as prices of key weights on the CPI dropped.
Zimbabwe however is in a unique situation as its central bank is incapacitated to address this continued slump in prices. In theory, in deflationary conditions, the monetary authorities would print more notes and increase money supply in the economy and in so doing push up prices thus helping the country exit deflation. Zimbabwe’s central bank which has recently begun the process of demonetising the abandoned Zimbabwean Dollar however, cannot print more currency to increase money supply and spur economic activity due to the multiple currency system it is using.
Still, in certain cases where deflation would have become entrenched, merely supplying more liquidity to the banking system is not enough to curb deflation. The government, private sector and the central bank have to work together to boost economic growth. This would help stimulate domestic demand and nudge the inflation rate above zero into positive territory.
A credible and tradable T-Bill market could also assist the RBZ in addressing deflation as it would be able to actively lower interest rates to encourage borrowing and further stimulate demand. The development of a robust T-Bill market would thus provide more ammunition for the RBZ to quell deflation, especially now that it cannot control its own currency.
Further, foreign direct investment is necessary to allow Zimbabwean businesses to recapitalise and retool. This would help increase capacity utilisation in industries, just under 40% at present. This would imply an increase in operations and the hiring of more workers, which could boost aggregate demand in the economy as incomes grow. The government therefore has to promote investor friendly policies and address structural bottlenecks that have hindered investments, like ageing infrastructure and utility supplies.
The argument pushed by monetary authorities that Zimbabwe has undergone price correction is not without merit though. Emerging from the pre-dollarisation era, some companies carried over unsustainable margins, and one of the legacy issues from that hyper-inflationary period is the inflation of margins by businesses. Again, increased competition in the face of cheaper imports has also caused businesses to relook their pricing structures. Nonetheless, more evidence lends weight to price falls largely being driven by lower aggregate demand.
As prices continue to decline in Zimbabwe, it remains to be seen if the necessary corrective policy measures needed to exit deflation will be carried out swiftly by the powers that be. For now however, Zimbabwe continues to be in a precarious position as the country`s central bank and the finance ministry – ever the optimists – seem to be caught up in denial, preferring to see current inflation trendsas disinflation and not deflation.