Economy’s future looks miserable

Zimbabwe’s deflation is predicted to stay as the government does not have enough fiscal space to expand expenditure and increase public spending power, analysts said. According to official statistics released, the country's annual inflation in March dropped to -0.91 percent, shedding 0.42 percent on February's -0.49 percent. This is the first time Zimbabwe recorded deflation after adopting multiple currencies in 2009. Analysts attributed the deflation to depressed aggregate demand in a poorly performing economy characterized by a biting liquidity crunch. Chairperson of the University of Zimbabwe's Economic Department Phineus Kadenge told Xinhua in an interview that deflation was likely to persist in the country for months because measures to correct the situation were normally medium to long term.

"I think it's going to take a while for us to increase economic activity that will ultimately boost national demand," Kadenge said, adding that some foreign banks had agreed to inject money into the economy, but the effect would take time to show. He said for as long as economic activity and demand remained suppressed, pressure on prices will remain very little leading to sustained deflation in the country. Zimbabwe's economy is currently reeling from depressed industrial output due to lack of lines of credit to finance production. This has seen the country relying heavily on imports to meet most of its needs, resulting in a huge trade deficit of around US$3 billion annually.

The government says economic growth slowed to 3.4 percent in 2013 from 10.6 percent in 2012. Finance Minister Patrick Chinamasa has set an ambitious growth target for 2014, or 6.1 percent, but few observers are as optimistic.  He added that Zimbabwe will make major policy changes in order to transform the economy which is fast declining due to lack of foreign direct investment, scarce capital for reviving crumbling industries and fears over the country’s controversial black empowerment programme. Chinamasa said the government is drafting a policy document that will transform the economy, which is also devastated by deflation. He said Zimbabwe will follow economic policies of countries like Mauritius, India and China that transformed their economies through establishing various economic zones while utilizing natural resources.

Independent economist Farai Zizhou said for as long as the liquidity crunch being experienced in the country persisted, no upward swing in inflation was expected. He singled out a weakening South African Rand against the U.S. dollar and the liquidity crunch as the two key issues driving deflation in Zimbabwe. The U.S. dollar is the currency of reference in Zimbabwe while the bulk of the country's imports come from South Africa. "Low aggregate demand being experienced in the country is a signal of low disposable income and if we are unable to find solutions especially with regards to the liquidity crunch, then we are likely to experience this kind of deflation for some time," he said. The economy remains under pressure with companies reportedly laying off workers or shutting down, unemployment and inflation rising while the government looks seemingly clueless on how to deal with such challenges.