Unpacking Zim’s deflation phenomenon

Zimbabwe has since October last year plunged in the throes of negative inflation, a phenomenon that some analysts have referred to as deflation – a condition as devastating to an economy as hyperinflation, from which the country only emerged from just over six years ago.

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The adoption in 2009 of the US dollar and other foreign currencies in place of the Zimbabwe dollar, stopped hyperinflation in its tracks after the annual inflation rate was estimated to have reached about 6,5 quindecillion novemdecillion percent – destroying personal savings and led the central bank to raid companies’ of their foreign currency accounts to staunch crippling foreign currency shortages.

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The figures for the country’s deflationary environment are less spectacular, but its impact on the fragile economy, is no less damaging.

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Zimbabwe first entered into deflation or negative inflation in February 2014 when year-on-year inflation rate declined by 0,9% – 0,49% from the January rate of 0,41%.

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In March, it fell to -0,91%, only to improve to – 0,26% in April. In May the inflation rate gained to -0,19%, an increase of 0,07% on the April rate. In June it slowed down to 0,08%.

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Between June and September 2014, the inflation rate climbed from negative territory only to fall back into the deflation zone from October up to January where the figure was – 1,28% from the December rate of – 0,80%.

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Economic pundits say the consequences for consistently falling prices of goods and services leads to declining profits, reduced incomes, factory closures and greater unemployment and once deflation is entrenched, it becomes difficult to escape.

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Japan, the world’s third largest economy, took decades to emerge from its 1990s deflationary economy.

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There are differing opinions as to what the inflation phenomenon obtained in Zimbabwe is, depending on people’s persuasions with some saying it is deflation whilst others believe that it is a mere correction of prices or disinflation.

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The International Monetary Fund defines deflation as a sustained decline in the aggregate measure of prices such as the consumer price index or the gross domestic product (GDP) deflator, which perfectly fits what Zimbabwe is going through.

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National Incomes and Pricing Commission chief executive officer Esau Ndlovu says although Zimbabwe was experiencing an inflation rate of below 0%, which technically suits the definition of deflation, what the country is experiencing is not deflation.

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“Deflation by definition is a decrease in the general price level of goods and services. It occurs when the inflation rate falls below 0%. However, in Zimbabwe we have or we are experiencing inflation rate of below 0%. Although from the technical definition, the situation may reflect a deflationary trend, but it is too early or unfair to concur with these observations.

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“A number of reasons may be cited towards refuting that a deflationary trend exists in the Zimbabwean economy. For almost a decade, the economy was under a hyperinflationary environment. The inflation rate at one point in time reached 231% from the official sources. So with this scenario, everyone in business pegged his/her prices on a 100% return basis. There was no regard for reasonable mark ups as the commodities were not readily available. It was not a matter of having the good or service at fair prices but having the good or service at all cost. So for sometime, the business mentality was that of making super profits on any transaction,” he added.

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Reserve Bank of Zimbabwe governor John Mangudya concurred with Ndlovu, and demystifies the confusion between disinflation and deflation.

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“Technically, inflation refers to an increase in the general price level. Essentially, inflation is experienced when prices increase on a comparative basis, monthly, quarterly or annually. In contrast, disinflation refers to sustained decline in the rate of inflation. In other words the rate of growth of general price levels is on the decline. Essentially policy makers institute deliberate policies to slow-down the rate of inflation in a manner that promotes the attainment of broad macroeconomic objectives, namely, promoting competitiveness of a country’s products in both the domestic and external markets, creation of employment and increase economic activity (GDP).

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Mangudya said deflation on the other hand, refers to a phenomenon where the rate of inflation falls below zero, especially for a sustained period.

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“In other words deflation is disinflation in the negative territory. Deflation is normally associated with general slowdown of economic activity, weakening aggregate demand and other attendant consequences such as unemployment and reduced incomes, he explained,” he said.

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IMF head of delegation, Dominique Fanezzi also believes that what is obtaining in the country is low inflation and not deflation.

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“What is currently obtaining in Zimbabwe is low inflation not deflation. This is because prices have gone down in a protracted way. What we are observing is that Zimbabwe is importing deflation from the global market, through petroleum imports,” he said last week.

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During the period leading to 2008, Zimbabwe experienced hyperinflationary episodes, which halted through the adoption of multiple currencies in 2009. Since then, the rate of inflation has generally been on a downward trend, a phenomenon suggestive of the symptoms of both disinflation and deflation.

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Mangudya said the inflation trend realised over the recent past in the main reflects the downward correction of prices, from the artificially and unsustainably high levels occasioned by the hyperinflation hangover inherited prior to 2009.

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“This was due to the relative undervaluation of the US dollar in Zimbabwe, vis-a-vis what the same unit could command in other countries in the region. Faced by general slowdown in demand for goods and services on the back of higher profit margins, the local industry is, therefore, slowly realising the need to correct the prices to more realistic levels, in order to compete with imported alternatives from low cost producers in the region and beyond,” he said.

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Ndlovu agreed with Mangudya that with the introduction of multi currencies in 2009, the same business mind-set of super profits continued, as such the pricing mechanism was heavily skewed towards profiteering.

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“The profiteering mentality was carried over in the US dollar period, and everyone failed to realise that we were now dealing with stable currencies.

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“Be it private or public sector, everyone was charging prices which were beyond the reach of many. Utilities, rentals, agricultural commodities to name just a few were exorbitantly priced. Even the wages in private sectors and some public entities were pegged at levels not commensurate with productivity. This created a high cost of production for the end goods and services which ended up highly and unreasonably priced,” he said

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Experts say with passing of time, everyone realised that the pricing system was not reflecting the true valuation of currencies being used, compared with the sub-region, as local prices are on the high side.

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Ndlovu said the studies carried out in South Africa and Zambia showed that Zimbabwe had high prices compared to these countries, thus it is right to argue that it is too early to say the country is in deflationary mode but rather in self-price correction mode.

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“For instance, at one point in time a 2 litre bottle of cooking oil was going for more than $5. With more imports of the commodity, competition has led to the reduction in prices of this commodity. Also with policy intervention and strategies devised by local players in the cooking oil industry, the prices have further reduced to as low as $3 per 2 litres bottle,” he added.

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The other cause of the current trends in price reductions can be attributed to access to finance by some companies allowing them to retool production processes thereby reducing production costs and inefficiencies.

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“This has resulted in some companies reducing their prices. Also competition has allowed manufacturing companies to relook at their pricing mechanism since most of the imports are now coming in cheaply due to the  rand which has for some time been weakening. It is therefore difficult to conclusively say the economy is in a deflationary mode but we can safely say there is some element of price correction,” Ndlovu told The Zimbabwe Mail.

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A good number of retailers fronted by giants Delta Beverages and Innscor Africa have reduced prices of their commodities in developments related to boosting low demand and the convenience ushered in by the introduction of bond coins.

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Notwithstanding the sustained decline in inflation, to levels below those obtaining in the neighbouring countries, Zimbabwe remains a high cost producer.

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Mangudya blames the high costs on inefficient production systems, arising from use of antiquated plant and equipment, and power outages.

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He added that the country has not been able to benefit from the positive spin-offs normally associated with low and stable rates of inflation.

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“These disproportionately high costs of production have undermined the competitiveness of local products, leading to constrained output of goods and services in the economy and widening supply gaps leading to the absorption of disproportionate imports of cheaper finished goods. In this regard we are pleased that Government has already put in place a National Competitiveness Commission that is conducting a comprehensive study on cost drivers in the economy, whose results and recommendations will inform decisive policy actions needed to correct the price misalignment within the economy,” he said.