News Column

World Bank Cautions Against Price Increases

June 15, 2014

Tarisai Mandizha

Zimbabwe should avoid increasing prices of goods and services to mitigate deflation, World Bank outgoing country economist Nadia Piffaretti has said.

Zimbabwe moved into deflation -- which is a decrease in the general price level of goods and services -- when year on year inflation shed 0,90 percentage points to -0,49%.

"One of the ways to mitigate deflation is avoiding increase in prices, but what we have seen, is that deflation has been driven by prices of tradable goods but their prices are starting to go down very strongly and also due to the effect of the rand, the tradable prices have gone down very strongly," Piffaretti said.

"Non-tradable are the goods that you cannot trade. Quite a number of services cannot be traded. The public services are not traded and those have gone up very substantially, so that kind of effect you should avoid."

Tradable goods consists largely those from the manufacturing industry and have export or import potential, while the non-tradable consists of services including health, education, electricity generation, transport, retail and construction.

Piffaretti said government should also avoid increasing the cost of electricity because in a deflationary environment this would make the country less competitive.

"You should avoid raising the cost of electricity because in a deflationary environment, this makes you even less competitive because what happens is that, if prices come down, your profits start to squint. Now if your cost like electricity is going up, your profit just disappears and you start making losses," she said.

"So it is very important that some of the costs should not be allowed to go up."

Piffaretti however said the current deflationary state in Zimbabwe was not a sickness but a cure.

"Deflation is not a sickness; deflation is the cure. The problem is that it's like when you are sick of cancer, deflation is like chemotherapy, so it's a strong cure. It does create a strong effect which might be problematic from a social point of view, that is why it is important to mitigate it," she said.

World Bank outgoing country economist Nadia Piffaretti

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Source: AllAfrica

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