Zim in­fla­tion 'im­ported':

The Herald (Zimbabwe) - - Business - 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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