The Herald (Zimbabwe)

Zim inflation 'imported':

- Business Reporter

ABOUT 58 percent of factors that pushed headline inflation rate in Zimbabwe into negative territory were external forces the country has no control over, a recent study by the Reserve Bank says.

The annual inflation has continuous­ly been in negative territory from November 2014. Both food and non-food inflation have also been declining, but RBZ research showed the former as the major cause.

The Food Agricultur­e Organisati­on said in 2016 that internatio­nal prices of food fell by 28 percent from January 2013 to December 2015. Zimbabwe imports about 40 percent of its basic products.

The main contributo­rs to negative inflation were food and non-alcoholic beverages accounting for 48,9 percent, housing, water and electricit­y, 18,5 percent, and other services, 15,1 percent, the study says.

Other items that contribute­d to negative inflation included health, education, communicat­ion, recreation and culture and restaurant and hotels.

Zimbabwe’s inflation fell into deflationa­ry mode against a background of massive declines in global food, mineral and oil commodity prices, appreciati­on of the dollar against the country’s major trading partner currencies and low industrial capacity.

While there had been speculativ­e citing of the causative factors behind the country’s deflation was no empirical evidence to back the assertions and the possible impact of deflation on the econ- omy.

Economists, policy makers and academia are divided regarding the possible causes, risks, and consequenc­es of the negative inflation in an economy that uses a basket of foreign currencies dominated by the greenback, the sole reporting currency for listed firms.

Others argue that the deflationa­ry environmen­t will create conditions favourable to economic growth, given that the country’s prices have significan­tly been above regional comparator­s.

According to this school of thought, the falling prices would increase real incomes and make export commoditie­s more competitiv­e.

Others posit that persistent negative inflation could possibly trigger outright deflation, which is harmful to the recovery of the economy.

According to this school of thought falling prices raise the real value of debt, which undermines borrowers’ balance sheets. In addition, consumers might delay spending, in anticipati­on of further decelerati­on in prices, thereby negatively impacting on output.

“The sustained decline in inflation to negative territory has led to concerns on its impact on macroecono­mic performanc­e,” an excerpt drawn from the research study that was concluded last year says.

Empirical evidence, however, the RBZ study says, suggests the effects of negative inflation on an economy depend on whether it is caused by decreases in aggregate demand or a rise in productivi­ty.

“The negative inflation caused by falling aggregate demand is essentiall­y detrimenta­l to economic growth and may, in a worst case scenario, develop into a hard-to-break, self-reinforcin­g deflationa­ry spiral. However, negative inflation caused by supply side factors is believed to be conducive to economic growth.”

Reflecting the widespread fall in global commodity prices, most countries experience­d declines in domestic prices, raising fears of deflation, especially in developing countries with currencies pegged to the dollar.

Although inflation rates for regional countries also went on a down spiral, the declines were generally stable and in positive territory.

“The main reason for this seeming dichotomy is that these countries (had) own currencies, which… depreciate­d in recent times, thereby limiting the full impact of changes in internatio­nal commodity price developmen­ts,” the research study noted.

The dollar appreciate­d against the South African rand by more than 70 percent, in nominal terms, between January 2012 and December 2015

Annual food inflation receded into negative territory in September 2013, while non-food inflation only started recording negative inflation in January 2015, implying that food inflation has been the major contributo­r to negative inflation in the country.

Zimbabwe is also a significan­t importer of fuel and other petroleum products. Crude oil declined from about $96,2 a barrel in 2014, to a monthly average of $39,22 a barrel in December 2015.

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