Zimbabwe, Deflation, and the Rand

Bloomberg journalists published an article yesterday entitled: “From Hyperinflation to Deflation, No End To Zimbabwe’s Decline.”

The big opener:

Consumer prices have fallen every month since March 2014, dropping 2.8 percent in July from a year ago. That’s a far cry from the days when prices rose an average of 500 billion percent at their peak in 2008, according to estimates from the International Monetary Fund.

The graph:

But then, this paragraph made me sigh:

Deflation comes with its own problems. It discourages consumers from spending as they anticipate prices will fall further, while declining margins reduces the incentive for businesses to invest and hire workers. That, in turn, limits wage increases, curbs tax receipts and worsens corporate and government debt burdens.

So here is my problem: deflation is not such an issue if the country more dependent on imports and diaspora remittances, than it is on local production and wages.

And if we’re looking for a likely culprit for the deflation, then we don’t need to look further than the depreciation of the Rand.

Consider this:

Thanks the Observatory of Economic Complexity

Then, specifically, what is being imported from South Africa:

To contextualise that:

Zimbabwe’s economy, back in 2012, was around $12.5 billion (as measured by GDP).
Total consumption (household and government consumption) was around $14 billion.
Total imports in 2012 were $7 billion (that’s half of total consumption).
Of that, South African imports were $3 billion (that’s 24% of GDP, and over a fifth of total consumption).
And those imports fell into almost every class of consumption good.

The important point: a fifth of Zimbabwean consumption is South African goods.

Then, the Rand since March 2014:

The cost implications of that:

Say a good for import into Zimbabwe cost R100.
Back in mid-2014, the USD cost of that was $9.52
Today, that same good would cost $7.84.
That is: South African imports are around 18% cheaper than they used to be.

So let’s extrapolate that out:

Take consumption of $14 billion.
A fifth of that gets an 18% discount.
So what was once $3 billion now costs $2.46 billion.
New total consumption is now $13.46 billion ($11 billion + $2.46 billion).
Oh – look at that. 4% deflation.

So actually, 2.8% deflation isn’t too bad.

What I’m trying to say is: if the deflation can mostly be attributed to importers lowering their margins in order to compete with the grey trade, then there is no loss of jobs linked to that deflation. That is, the margins can come down because the margins were increased by lower import costs to begin with.

The Bigger Problem

Unfortunately, while the depreciation of the Rand might neutralise the deflation side of things – it is causing severe liquidity problems within the Zimbabwean economy.

In particular, it’s a problem of remittances.

I’ve written about them before (How is Zimbabwe doing it?), but let me repeat it here, and start with some quotes from the 2014 Labour Force Survey released by ZimStat (Zimbabwe’s National Statistics Agency).

In a slightly tautologous moment, this:

The 2014 LFCLS showed that 81 percent of the working age population was employed. The national employment to population ratio stood at 81 percent.

Which doesn’t sound so bad. Until two paragraphs later, when:

Ninety-four percent of the currently employed persons 15 years and above were informally employed. Ninety-eight percent of the currently employed youth aged 15 – 24 years and 96 percent of currently employed youth aged 15 – 34 years were in informal employment.

Just to be clear, 94% of the supposedly-employed are only “employed” because they are considered “economically-active” in the “informal market”.

And that’s government statisticians admitting that less than 5% of Zimbabwe’s working age population are formally employed.

So where is the consumption power coming from?

Well, it’s being heavily subsidised by remittances.

Here is the chart that Bloomberg gave us in their article:

From what I’ve read, that 2014 figure is far too low an estimate – and in any case, that is just remittances through formal banking channels. Once you take into account the fact that a portion of imports are actually “remittances in kind”, some estimates point to a total remittance figure of around $3.5 billion per year.

Now consider that 88% of the Zimbabwean diaspora live and work in South Africa.

And they are facing that same 18% discount for every R100 that they try to send home.

In fact, three years ago, the exchange rate was R7.50. So where that R100 was once arrived as $13 – today, that same R100 would arrive as $7.40. Nearly half what it once was.

So how is that for a liquidity crisis? You have a country that depends on remittances – and the USD value of remittances from the country that houses 88% of the diaspora has halved over the last three years.

Either way, the weak ZAR isn’t helping.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.