The Sunday Mail
THE unprecedented drop in the price of goods on the local market relented last month as the consumer price index — a measure of the weighted average of prices of a basket of consumer goods and services – gained 0,1 percent to -0,08 percent in June.
However, the country remains in a deflationary environment, a situation that first manifested in February. Since then, debate has been raging on whether the slump is being caused by a self-correction of commodity prices or an uncontrollable liquidity-induced decline.
Deflation is regarded as a decline in prices usually caused by a reduction in the supply of money or credit. It can also be caused by a fall in Government, personal and investment spending.
FBC Holdings group chief executive officer Mr John Mushayavanhu – one of the most powerful bankers in the country by virtue of the size of the institution he heads – stoked debate on May 21 this year when he said the deflation was more a correction of prices than a sign of a shrinking economy.
“If you look at our inflation, I believe that is a correction of past mischief and for me it is a good thing,” stated Mr Mushayavanhu.
Often deflation, as a precursor to both an economic recession and depression, is generally feared for its negative impact on industry. But inasfar as the nature of the country’s deflation is concerned, the economic variables that are key to defining the phenomenon – money supply and credit – are conflicted.
Statistics from the Zimbabwe Revenue Authority indicate that money supply, as shown by the increase in the country’s revenue-generating capacity, has been improving since 2009.
While Zimbabwe only managed to generate US$988 million in 2009, collections rose to US$2,2 billion in 2010. In 2013, Zimra raked in more than US$3,4 billion.
Bank deposits have, naturally, been improving with the latest statistics showing the figure at more than US$4,82 billion as at March 31, 2014.
But despite increases in both revenue collections by the State and bank deposits by the financial services sector, demand for goods in the retail sector remains muted.
In its annual report for the year ended March, 31 2014, supermarket giant OK Zimbabwe indicated that its revenues were flat, rising by a marginal 0,8 percent to US$483,7 million from US$479,6 million in the same period a year earlier.
Net profit plummeted 22 percent to US$9,7 million as a result.
Similarly, TM Supermarkets, a subsidiary of the Meikles Group of Companies, also reported in its recent annual financial report covering the same period that turnover had declined to US$334 million from US$336 million compared to a year ago.
Though customer counts throughout the company’s store footprint climbed 8 percent, the average cost of the product to the consumer declined.
However, the retailer is not discouraged and is actually planning to increase its trading space by 18 percent from the current 55 000 square metres.
While the prices of goods have generally been falling, it seems inflation at the factory gate (the factory gate price) or producer price inflation, which is measured at the manufacturer before any mark-up is made by the retailer, has been increasing, suggesting that retailers might be selling their goods at relatively discounted prices.
The Zimbabwe National Statistics Agency notes that the producer price index rose from 111,6 basis points in December 2013 to 111,8 basis points by the end of March 2014.
The sub-index measuring foodstuffs also jumped from 108,9 basis points in December 2013 to 109 in March this year.
The measure was reset at 100 basis points in 2009 when the economy was dollarised.
Major year-on-year changes in producer prices were, however, recorded in basic metals, paper and paper products and non-metallic mineral products, increasing 7,4 percent, 6,5 percent and 5,2 percent, respectively.
Even as retail prices have been dropping, it has never been proven that the mark-ups that were being levied on consumers were reasonable in the first place.
University of Zimbabwe economics lecturer Dr Albert Makochekanwa contends that the price of goods is mainly declining because of low disposable incomes. He, however, noted that the decline is not wholesale as it was only in some consumer goods and that some prices are actually rising.
“In our case, there are a number of reasons why prices are declining; chief among them is that many people don’t have higher disposable income to buy goods and services so, at the end of the day, people are not buying as much as they want versus the available goods.
“So, in economics we know that when there is too much supply versus low demand, there is a tendency for prices to decline because if you are selling bread and you find that people are not buying, what do you do? You may just decide to reduce the price so that you get some buying of some sort otherwise the bread will rot,” said Dr Makochekanwa.
He also conceded that prices could be self-correcting given that upon adoption of multiple currencies in 2009, the cost of most goods and services were relatively high compared to regional averages because of high local production costs.
“There is also the issue where we are saying most of the prices, mainly of consumables, which are in competition basically with goods from South Africa, were high. Goods from South Africa are relatively cheap because they have what is called mass production in economics.
“When you produce more, your costs tend to be low; so, South African goods come here relatively cheaper and people tend to go for those and local manufacturers might be forced to reduce prices so that they may be able to compete with lowly priced South African goods.
“So prices might be declining in tandem with regional prices. There is also the fact that because of competition you might be forced to reduce prices so that you stay in business.”
His overall assessment is that demand is generally softening.
Deflation is often a scourge in Japan where, because of mass production, the markets are usually flooded with goods, leading to a marked decline in prices.
Successive Japanese administrations have been trying to shake off the phenomenon, with the Japanese central banks often resorting to quantitative easing in order to try and stimulate demand in the economy. But Zimbabwe is not producing much.
Explained Dr Makochekanwa: “In our case we are not producing much; that is why I am saying it’s more of a demand side-induced decline of prices.”
Capacity utilisation in the manufacturing sector has been declining since 2011 from about 57 percent to 39 percent last year largely due to cash shortages, high utility charges and erratic power supplies. It is widely expected that capacity utilisation would plunge by 10 percent this year as macro-economic fundamentals remain under stress.
Economist Mr Givemore Kapuyanyika said according to the “injections-leakages approach” propounded by Keynesian economists, deflation could worsen if the country continues to lose huge sums of money in importing.
“If the injections flowing from the tap (from foreign sources) are less than the leakages, then we have a disequilibrium, which is what is happening in Zimbabwe as we are having more leakages than injections.
“Our leakages are in the form of imported cars, clothes from Tanzania, and foodstuffs from South Africa. Therefore, the money that goes to other countries through our imports everyday is not being recovered hence the shrinking money supply. As result, households are now left with a few notes and coins for transaction purposes, hence a fall in demand for goods and services.”
Deflation can be considered dangerous in situations where the retail price of goods fall below producer prices.
The International Monetary Fund recently indicated that Zimbabwe’s inflation is forecast to remain low during 2014 at 0,2 percent, but is expected to peak to 1,2 percent in 2015.
It is feared that the trend might hurt the country’s capacity to produce.
