Africa

Zim: Powerless to stop deflation

Jason Moyo

With no stimulus or currency measures at hand, the Zimbabwean government can do little but watch the downward spiral.

Brokers at the Zimbabwe Stock Exchange are downgrading their forecasts. The ZSE has over the past two years been one of Africa's best-performing markets. (Aaron Ufumeli)

After enduring years of world-record hyperinflation, Zimbabwe's economy has swung to the other extreme: deflation. The country's inflation rate has now fallen below zero, slipping into a new era that economists say makes the already dim recovery ­prospects even worse.

Annual inflation in February fell into negative territory for the first time, coming in at -0.49% from 0.41% in January, according to ZimStat, the national statistics agency. Whereas inflation shows the rate of price increases, deflation reflects that prices are falling.

Although this may seem like a good thing, it points to falling production in factories and poor demand for goods as job losses pile up. It also means spending by the government and consumers is falling as ­investment dries up.

Deflation is notoriously hard to get rid of. Japan has been caught in the spiral for 15 years.

In Zimbabwe, with the central bank unable to intervene because the multiple currency system means it cannot print money, the data will once again open the debate about whether Zimbabwe should get back to its own currency.

Inflation has fallen sharply since 2009, when Zimbabwe ditched the Zimbabwe dollar for foreign currencies.

Before then, inflation was last measured at 231-million percent in August 2008, before the government put a lid on the data and stopped making the embarrassing figures public.

But towards the end of last year, the relief that the new currency regime brought started to wear off, as weak consumer spending and rising costs caused company closures.

Defaults
The economy, which steamed ahead after 2009, grew by only 3.4% last year, and the government said the country needed $27-billion – twice the size of the economy – to reach its 9% growth target by 2018.

Government revenue also fell sharply. In January, tax revenue of $266.6-million was collected, lower than the target of $278.6-million. The treasury said company closures were behind falling tax earnings.

The government is already defaulting on paying off its workers' credit facilities, with major stores such as Edgars, which have relied on credit to public servants for steady income for years, feeling the effect.

The defaults will affect dozens of other retailers, which give credit to thousands of government workers.

Former Finance Minister Tendai Biti believes the government may soon be unable to pay its workers – who have been promised a wage increase in April.

"During my time, we used to collect money, and 75% of that used to go to the wage bill, now they can't collect to pay the wage bill. This is before the threatened increase," said Biti.

Job losses
Data obtained from the Employers' Confederation of Zimbabwe, which represents the country's employers, shows that more than 22 000 jobs have been lost since 2009.

The main trade union federation, the Zimbabwe Congress of Trade Unions, believes the job losses have been higher, with its estimates as close to 10 000 losses in the past year alone.   

The central bank has admitted it is "constrained" and cannot intervene in the Zimbabwean economy for as long as it uses the US dollar.

According to analysts Econometer, there is little that the government can do but watch.

"The government can only follow inflation trends, with no fiscal or monetary policy measure to ­influence them in the short to medium-term view."

There are fears that, frustrated with its inability to influence the economy, the government may once again be tempted to return to the Zimbabwe dollar so that it can print money. But government officials insist there are no such plans.

"It cannot do much," said fund manager Richard McCawley. "Deflation [requires a] government to stimulate demand, making sure industry produces and workers get jobs and salaries. It is not something within our government's reach at the moment."

Though France said this week that it might resume direct aid to Zimbabwe, and other European countries were also considering lifting financial sanctions, it was unlikely this would pull Zimbabwe out of "the red zone", McCawley said.

"Ironically, the Eurozone has its own deflation fears. It has better things to do with its money."

Downgrading
At the Zimbabwe Stock Exchange, which over the past two years has been one of Africa's best-performing markets, brokers are downgrading their forecasts.

Stockbroker Lynton-Edwards, one of the two largest traders on the market, described February as having been "pretty gloomy for equities".

"We believe trading on the local market is likely to remain subdued for the rest of the year.

"We do not foresee any significant change in fortunes, even at macro-economic level," Lynton-Edwards said in a research note last week.

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