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News Analysis: Prolonged deflation feared in Zimbabwe

English.news.cn   2014-04-16 01:06:30            

HARARE, April 15 (Xinhua) -- Zimbabwe's deflation is predicted to stay as the government does not have enough fiscal space to expand expenditure and increase public spending power, analysts said.

According to official statistics released Tuesday, the country's annual inflation in March dropped to -0.91 percent, shedding 0.42 percent on February's -0.49 percent.

This is the first time Zimbabwe recorded deflation after adopting multiple currencies in 2009. Analysts attributed the deflation to depressed aggregate demand in a poorly performing economy characterized by a biting liquidity crunch.

Chairperson of the University of Zimbabwe's Economic Department Phineus Kadenge told Xinhua in an interview that deflation was likely to persist in the country for months because measures to correct the situation were normally medium to long term.

"I think it's going to take a while for us to increase economic activity that will ultimately boost national demand," Kadenge said, adding that some foreign banks had agreed to inject money into the economy, but the effect would take time to show.

He said for as long as economic activity and demand remained suppressed, pressure on prices will remain very little leading to sustained deflation in the country.

Zimbabwe's economy is currently reeling from depressed industrial production due to lack of lines of credit to finance production. This has led the country to heavily rely on imports to meet most of its needs, resulting in a huge trade deficit of around 3 billion U.S. dollars annually.

The government says the economic growth slowed to 3.4 percent in 2013 from 10.6 percent in 2012. Finance Minister Patrick Chinamasa has set an ambitious growth target for 2014, or 6.1 percent, but few observers are as optimistic.

Independent economist Farai Zizhou said for as long as the liquidity crunch being experienced in the country persisted, no any upward swing in inflation was expected.

He singled out a weakening South African Rand against the U.S. dollar and the liquidity crunch as the two key issues driving deflation in Zimbabwe.

The U.S. dollar is the currency of reference in Zimbabwe while the bulk of the country's imports come from South Africa.

"Low aggregate demand being experienced in the country is a signal of low disposable income and if we are unable to find solutions especially with regards to the liquidity crunch, then we are likely to experience this kind of deflation for some time," he said.

Harare-based economist Moses Chundu noted that the drivers of deflation operated in a vicious circle and were more difficult to arrest when compared to hyperinflation.

"With hyperinflation you can cool it down by stopping the printing of money but with deflation it's a domino effect. People are not spending because they don't have money and when people don't buy companies will produce less and when there is less production and fewer sales then companies will lay off people," Chundu said.

"So it's like cancer and to stop it you need drastic measures and dramatic policy proposals," he added.

Chundu lamented government's constrained fiscal space to boost domestic expenditure, as well as the absence of substantial bailouts from world financial organizations.

Of the government's 3.6 billion U.S. dollars expenditure budget this year, 73 percent will be allocated to pay wages of government employees, leaving little space for development, according to the budget statement revealed by Chinamasa earlier this year.

Chundu said in the absence of its own currency Zimbabwe needs an injection of money for foreign countries and international lenders. But the decade-old sanctions imposed by the West and the 1.96 billion U.S. dollars arrears to multilateral creditors, mainly Breton Woods institutes, made the flow of money difficult.

Zimbabwe had resorted to the difficult option of increasing export at a time when most of its companies had stopped exporting due to low production and uncompetitiveness of their products.

"Overall, it's a very bleak future," Chundu said.

Editor: yan
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