Deflation in Zimbabwe: Causes and risks

Abstract

This study seeks to identify the determinants of the persistent deflationary pressures that continued to besiege the economy of Zimbabwe for the period January 2012 to June 2015. The study highlights the risks associated with deflation that lead to stalled economic growth and unemployment. Identification of the causes of deflation is critical for the purposes of formulating informed policy interventions aimed at regaining a desired and sustainable economic trajectory. Due to cointegration of series, an Error Correction Model was regressed on E-views 7 to establish possible causes of deflation in Zimbabwe for the period January 2012 to June 2015. The study established that deflation is mostly driven by declining interest rates, deflation expectations, income growth and depreciation of the rand against the US Dollar. These findings are in tandem with problems associated with monetary authorities that are not in control of the monetary aggregates of the economy. The introduction of the multicurrency regime in Zimbabwe in 2009, meant that the Reserve Bank of Zimbabwe lost control of monetary policy tools. It could not influence interest and exchange rates to manage economic fundamentals that continued to make imports cheaper and exports uncompetitive. The results suggest that the price levels of tradeable goods in Zimbabwe and South Africa were converging partly as a result of depreciation of the Rand against the greenback. The study recommends that Zimbabwe should use a currency that it has control over. This is either through use of its own currency or through formal dollarisation with any country whose currency is currently in Zimbabwe’s basket of official currencies. These options would give room for monetary authorities in Zimbabwe to make policy interventions to correct undesirable economic developments