Assessment of the risk of deflation in Zimbabwe

Debates have spanned over whether Zimbabwe faces disinflation or deflation. Amid global concerns on the risk of deflation in the Eurozone, this paper hypothesizes that Zimbabwe faces aggravated risk. This is due to the country’s experiences with deflation for five consecutive months since February 2014 and subsequent contractions in demand for commodities and money supply. This paper’s assertion ceases to be hypothetical in the midst of literature on deflation risk in the experiences of Japan, German, US, Greece, China and Hong Kong. Nonetheless, there is lack of appreciation of potential challenges in some circles of Zimbabwe and as such the paper provided insight into the causes and costs of deflation. The methodology entails the use of an Index of Deflation Vulnerability which has eleven measures compiled for the period 2006-2015. Each measure is a binary (1/0) indicator showing possible deflationary pressure from that source. The findings indicate that Zimbabwe is under high risk of deflation and aggressive action is required to avoid straying further away from price stability. It is therefore recommended that there is need to develop a macroeconomic framework which embraces the challenges of dollarization and enabling coordination of fiscal and structural policies with monetary policy