RBZ urged to tackle deflation

HARARE - The Reserve Bank of Zimbabwe (RBZ) must introduce an inflation-oriented policy as part of strategies to halt deflation and grow the economy, a South African-based think tank has warned.

Oxford Economics research company NKC African Economics (NKC) said in light of deflationary pressures that have haunted Zimbabwe for over a year, the central bank needs to put in place mechanisms to deal with the negative inflation.

“In the wake of deflation being around for more than a year and continued business shutdowns, we expect the RBZ to introduce an inflation-oriented policy at its next monetary policy presentation.

“Deflation is detrimental to productive sectors of the economy, consequently reducing economic growth,” NKC said.

The Zimbabwe National Statistics Agency (Zimstat) recently published its consumer price index (CPI), which revealed that the country registered negative inflation for the better part of last year.

The statistics agency noted that headline inflation for December increased marginally to –2,47 percent year-on-year, compared to –2,46 percent year-on-year in November.

On a month-on-month basis, the CPI contracted by 0,11 percent in December, following the 0,16 percent month-on-month increase in November.

NKC noted that the trade sub-index has been increasingly driving deflationary pressure, suggesting a pass-through from the depreciating South African rand against the US dollar, which is widely used in Zimbabwe.

“The rand weakened by 7,2 percent during the course of December. According to ZimStat, the country’s imports are mainly from South Africa and accounted for 38,19 percent of the import bill in the third quarter of 2015,” the research unit added.

Zimbabwe was driven into deflationary territory in October 2014 and has remained there with year-on-year inflation for the whole year tinkering in the negative due to sluggish domestic demand and a weak rand.

The latest inflation figures after Zimbabwe’s largest insurance company Old Mutual predicted that deflationary pressures being experienced in the country were likely to persist into the foreseeable future in the absence of strong economic reforms.

In its monthly economic brief, 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.

Zimbabwe’s economy is struggling to gain traction nearly two-and- half years after President Robert Mugabe won a disputed election in July 2013.

Foreign exchange inflows declined last year and consumer spending remained weak, threatening production

Comments (2)

NKC is absolutely correct. Zimbabwe indeed is in a full deflation and to get out of this deflation fiscal and monetary policies are needed to inject liquidity in the economy to stimulate growth. You cannot fight deflation with higher taxes and unsustainable govt recurrent expenditures. Zimbabwe needs appropriate monetary and fiscal policies to get the Zimbabwe economy out of a deflation.

Mambo - 22 January 2016

Why should they fight deflation when prices are too high. for example a 2L cocacola costs $2.5 in Zimbabwe and R16 in South Africa. We need that deflation to bring the prices in line with other countries.

Alois - 25 January 2016

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