Zanzibar economy plunges into deflation

Zanzibar has registered deflation of – 0.2 per cent in March, from – 1.7 per cent in February, driven mainly by fall food and fuel prices. Deflation is a phenomenon that occurs when overall prices are declining to register a negative figure.

Bank of Tanzania (BoT)

Bank of Tanzania (BoT)

It is the opposite of the often-encountered inflation. Deflation, according to economists, occurs following reduction of money supply or credit availability.

The economists argue that it is often associated with reduced investment spending by government or individuals. “Deflation leads to a problem of increased unemployment due to drop in demand,” according to an economist.

The Bank of Tanzania (BoT) Monthly Economic Review of April says “month-to-month headline inflation was negative 0.2 per cent in March 2015 compared with negative 1.7 per cent in the preceding month”.

The central bank attributed the month-to-month deflation to food inflation which went down to negative 1.6 per cent in March compared with negative 0.1 percent.

“(This was), mainly on account of decrease in prices of rice, fish and bread,” BoT says in the report. However, non-food inflation eased to 0.1 per cent during the year ending March 2015 from 1.9 per cent recorded in February 2015, mainly driven by a continued fall in fuel prices.

Normally central banks aim to keep the overall price level stable by avoiding situations of severe deflation or inflation. Both deflation and severe inflation may infuse a higher money supply into the economy to counter – balance the deflationary impact. In most cases, a depression occurs when the supply of goods is more than that of money.

Meanwhile, the report shows, annual inflation which excludes food and energy (core inflation) rose to 2.9 per cent in March from 2.7 per cent in the preceding month.

Annual inflation for energy and fuels dropped to negative 10.1 per cent from negative 2.0 per cent in line with recent developments of falling prices in the world market for fuel. On other hand Annual headline inflation declined to 0.9 per cent in March 2015 from 1.7 per cent in February 2015, mainly driven by fall in prices of wheat flour, sugar, banana and fuel.

Food inflation remained unchanged at 1.6 per cent in the year ending March 2015 as in the year ending February 2015, as fall in prices of some food items were offset by increase in fish prices.