Deflation to persist: Old Mutual

HARARE - Zimbabwe's largest insurance company, Old Mutual, says deflationary pressures being experienced in the country are likely to persist into the foreseeable future in the absence of strong economic reforms.

In its monthly economic brief released this week, Old Mutual said deepening deflation in the absence of effective policy tools to reflate the economy paint a weak earnings outlook.

“We anticipate consumer price deflation to cascade to asset deflation on the back of weak earnings and shaky investor sentiment,” the insurance giant said.

This comes after inflation for October 2015 declined from –3,11 percent in the previous month to –3,29 percent.

Month-on-month inflation closed at –0,29 percent, up from –0,36 percent in the previous month, driving year to date inflation to –2,52 percent compared to –0,11 percent in the same period last year.

Market experts say deteriorating domestic demand and continued appreciation of the United States dollar against major trading partner currencies are cited as some of the reasons behind the deepening deflation.

Zimbabwe has been experiencing low inflation since 2009 when the country made a decision to scrape the local currency in a move that helped end hyperinflation as it cut off the government’s ability to print money to pay debts.

At the same time, it eroded manufacturers’ competitiveness by making it cheaper to import everything from food to clothing rather than produce them in a country suffering from a lack of cash, power shortages and high costs.

With Zimbabwe adopting the United States dollar and currencies such as the South African rand as legal tender, authorities have no ability to boost money supply in the economy.

The low inflation rates have resulted in the country, which grew on average 9,2 percent a year between 2009 and 2013, struggling to reach its 1,5 percent economic growth set for 2015.

Evidence of Zimbabwe’s economic slide is brought to life by hundreds of abandoned buildings, workshops and factories which line the pot-holed roads in Harare’s industrial areas.

The situation is even worse in Bulawayo, the second-largest city, where production has been hobbled by water shortages.

More than 200 businesses shut across the country last year and this year and just 36,4 percent of the country’s manufacturing capacity is being used, according the Confederation of Zimbabwe Industries.

Economic analysts say the country’s economic woes have been exacerbated by foreign investors who have been skirting Zimbabwe in favour of its regional neighbours since 2013 when President Robert Mugabe won the elections, pushing ahead with plans to force foreign-owned businesses to cede majority stakes to black Zimbabweans.

Comments (4)

Clearly Zimbabwe is now in a deflation. The issue is what is the tool kit to reflate the economy? Zimbabwe is unable to use traditional methods of increasing money supply to stimulate aggregate demand bocoz it cannot print the USD, Rand etc. Exports are being inhibited by the strengthening USD and lower prices and demand on the world market especially for minerals, power supplies challenges etc. Zimbabwe cant borrow externally becoz of the debt overhang and other domestic toxic issues. Re-engagement and implementing reforms is being resisted by hardliners. So which way Zimbabwe?

Morgan - 17 December 2015

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