Hyperinflation in Zimbabwe: Causes and Interventions

ASHESH KAUSHIK 2009B3A3466G

All nations, despite having different political identities, seek to achieve some generic economic goals and objectives such as steady economic growth, price stability, full employment and a positive trade balance. Of these objectives, economic growth is the most fundamental objective in the economic success of a nation. However, many economists contend that price stability is the principal economic goal in any economy since its objective is to keep inflation low and stable. Mindful of the apparent lack of consensus on which one goal is principal, it is evident that both goals are fundamental to the development of a nation. Hyperinflation is an uncommon occurrence which only occurs when the supply of money has been governed by unrestricted paper money principles. A glaring example of an economy gone bad because of hyperinflation is the Zimbabwean crisis.

The Zimbabwean Setting At the time of independence in 1980, Zimbabwe had a much more developed economy than most of its sub-Saharan counterparts. At the time, Zimbabwe had an average growth rate of 4.3% per annum making it the envy of sub-Saharan Africa. Dell (2005) agrees and states that Zimbabwe was a land of great hope and optimism in Africa. Coupled to this, Zimbabwe had the most developed capital market in all of Africa, second only to South Africa. As such, Zimbabwe was a symbol for the rest of the world of what Africa could become.

Twenty years on since independence, and contrary to expectations, Chitauro declared that Zimbabwe is still a developing country. Likewise, in 2008 Coltard stated that Zimbabwes economy had collapsed and was in a free fall. Dell gives a similar overview of the economic state in Zimbabwe. An excerpt from Dell reads: I know of no other example in the world of an economy that, in times of peace, has contracted so precipitously in the course of six yearsa problem with deep, deep roots exists A quantitative analysis of the situation in Zimbabwe reveals that the real Gross Domestic Product (GDP) fell by almost 30% from 1997 to 2003 and continued to fall through 2004 and 2005 (Dell, 2005). Surprisingly, this turn of events in Zimbabwe occurred when African countries were beginning to achieve reasonable growth rates. By 2003, the Zimbabwean economy was shrinking faster than any other economy in the world at 18% per year (Richardson, 2005). Simple reasoning suggests that Zimbabwe was experiencing an economic crisis. As such, Zimbabwe was not achieving sustained economic growth that is set against a background of price instability, which ultimately led to the continual collapse of the economy.

The Causes of Zimbabwes Problem Numerous reasons have been given as being the cause of Zimbabwes economic collapse. Some of the most popular reasons are listed below:

According to President Mugabe, a number of droughts have led to Zimbabwes economic collapse (Richardson, 2005)

Richardson (2005) states that disregard for the rule of law and property rights has led to Zimbabwes economic collapse

The Zimbabwean government is to blame because of its economically catastrophic measures (Bloch, 2007)

Erratic government policies are to blame for Zimbabwes economic collapse (Coltard, 2008).

Generally, the Zimbabwean governments official position has been that any economic difficulties are a result of either drought or sabotage by its enemies. Richardson (2005) states that the government has blamed the economic collapse on western conspiracies and racism. Similarly, on several occasions President Mugabe has stated that a ploy against him by the West is responsible for Zimbabwes woes (Wines, 2007a). Zimbabwe Reserve Bank Governor Gideon Gono, blamed

sanctions, banks, the Zimbabwe Stock Exchange, black-market currency dealers, as well as insurance companies for wreaking havoc on the economy (Nyarota, 2009a). However, Mutambara, the Deputy Prime Minister of Zimbabwe, presented an altogether new, attention-grabbing, alternate origin of the sanctions. Mutambara (as cited in Nyarota, 2009b) argues that the worst types of sanctions Zimbabweans have are sanctions the country imposes on its self. He further stated that these selfimposed sanctions are in the form of: Corruption Misgovernance Fraudulent elections

Violence

Finance Minister Hebert Murerwa stated that, even though Zimbabwe faces a number of challenges such as: Corruption Declining savings and investment Inadequate foreign exchange - affecting import capacity Erratic fuel supplies, and Interruptions to electricity supply

inflation remains Zimbabwes biggest challenge. As a result, even though numerous reasons have been highlighted as the potential cause of Zimbabwes problem, the Zimbabwean government in 2003 declared in a maiden Monetary Statement (and subsequent Budget statements) that inflation is the number one foe, the root cause of Zimbabwes crisis. Hanke (2008a) further validates this assertion by stating that hyperinflation is the hallmark of Zimbabwe's economic collapse. Zimbabwe now lies in second place in the world hyperinflation record books. The singling out of inflation, by the Zimbabwean government and scholars alike as the foremost cause of Zimbabwes economic collapse characterised by a lack of economic growth led to the conception of the notion to investigate the causes of hyperinflation in Zimbabwe and the policy changes required to curb this hyperinflation.

Overview of Hyperinflation in Zimbabwe

Zimbabwes inflation soared from about 20% in December 1997 to over 1,500% annually in 2006. According to Hanke (2008a), in 2008 inflation in Zimbabwe was a staggering 165,000% year-on-year. In early June 2008, inflation stood at about 2.5 million per cent per annum (Hanke, 2008a). Hanke (2008b) reported that Zimbabwe had entered the misery of hyperinflation with inflation well over the 50% monthly threshold for qualifying as hyperinflation. Hanke (2008e) developed the Hanke Hyperinflation Index for Zimbabwe (HHIZ) to quantify the depth and breadth of the crisis in Zimbabwe. Hanke (2008e) developed this metric using market-based price data. On 14 November 2008, Zimbabwes annual inflation rate was 89.7 sextillion per cent. In the subsequent months following this publication, the annual inflation rate of Zimbabwe rose to 6.5 quindecillion novemdecillion per cent, that is 65 followed by 107 zeros (Ali-Dinar, 2009). Zimbabwes hyperinflation was destroying the economy, pushing more of its inhabitants into poverty, and forcing millions of Zimbabweans to emigrate (Hanke, 2008a). Keeton (2009) suggested that the collapse of Zimbabwe has been more prominent than other nations that have experienced similar hyperinflation episodes. According to Gono, inflation in Zimbabwe resulted in the erosion of purchasing power of incomes. Hanke (2008a) stated that hyperinflation has robbed people and financial institutions of their savings and capital respectively. Gono added that inflation in Zimbabwe also resulted in widespread uncertainty hindering business planning. He reported that inflation also resulted in the following: Tentative activities, which re-route goods from productive activities A strain on the countrys foreign exchange due to increased import demand

Low worker-drive, which affected productivity, quality and the supply of goods

Suppressed economic growth

Rosenthal (2008) stated that inflation in Zimbabwe became so severe that citizens had been plunged into a Darwinian struggle to survive. He wrote Many citizens have been reduced to hoboes and vagabonds, and black-market dealers, a result of one of the greatest hyperinflations in the world. Basckin (2009) states that due to the severity of Zimbabwes hyperinflation, the dollar has become so insignificant, so much so that even a trillion dollars cannot purchase as little as a loaf of bread.

The Causes of Zimbabwes Hyperinflation According to Hanke (2008f) the source of Zimbabwes hyperinflation was the Reserve Bank of Zimbabwe (RBZ). Hanke (2008c) states that the Zimbabwean government spent, and the RBZ financed that spending by printing money. Marwizi (2005) stated that excessive money supply fuelled inflation in Zimbabwe because of the governments continued expensive and unplanned expenditure, aimed at consolidating its dominance of the political landscape. Wines (2006) asserts that President Mugabe printed trillions of Zimbabwean dollars to keep ministries functioning, as well as to shield the salaries of key supporters and potential enemies against inflationary erosion. Ncube (2009) agreed that the governments US$23 million a month expenditure on salaries for ministers and allowances for civil servants was testimony enough of the governments unplanned and largely partisan fiscal expenditure.

Lee (2009) was of the view that the RBZ governor, Gideon Gono, backed by President Mugabe, was responsible for printing enormous quantities of money against the advice of orthodox economic practice. In response to similar assertions, Gono suggested that he has in fact been providing ideal policies in an effort to turn around the fortunes of the economy. In fact, Gono stated that most of his policies had actually become the envy of the international community. In the same context, Gono concedes that Mugabe (Nyarota, 2009b) regulated and acknowledged his actions.

Suggestions to Curb Zimbabwes Hyperinflation Gono, as cited in Mereki (2008) stated that if he has to print money for infrastructure he will do so until sanctions are removed. He further added that this is an obligation that he is ready to be dismissed for, as the country gravely needs money for infrastructural development. Zimbabwe needs to end this process in order for the country to end hyperinflation (Keeton, 2009). Stopping hyperinflation is not an easy task as the government must resort to living within their means, the very same thing that they are unable to do which causes hyperinflation to start with. Keeton (2009) stated that in searching for the required policy to end hyperinflation, Zimbabwe can draw upon a large body of international policy experience from more than twenty countries that, since 1920, have experienced and ended hyperinflation successfully. In recent attempts to tackle hyperinflation, the RBZ launched

Operation Sunrise where the bank introduced a new set of monetary bearers cheques (effectively the standard currency) that devalued the currency by removing three zeros from each denomination: Z$ 1,000 has become worth Z$ 1. Hanke

(2008e) suggests that getting rid of the RBZ in Zimbabwe is the only way to end hyperinflation and adds that dollarization, that is the adoption and use of other currencies such as the Rand and the United States dollar to replace the discredited Zimbabwean dollar may also end hyperinflation in Zimbabwe. In order for Zimbabwe to stop hyperinflation there is a need to eliminate the source of excessive money supply. Zimbabwe needs a broad-based policy package of internationally accepted policies to end hyperinflation. These policies need to include Transparent transfer of fiscal activities to the government budget Fiscal shrinking of the RBZ or any other public entity The imposition of budget constraints on public enterprises The establishment of a strong money anchor

A common solution is for the country to abandon its currency altogether and use another, more stable currency. Zimbabwe could adopt any number of currencies ranging from the US dollar to the Euro or the South African Rand. It is less important what currency is officially adopted because generally if people mutually agree to conduct trade or business in a currency, this is good for the economy. Eventually, because of how economies arise, the usual tendency is for one currency to dominate even when people have the ability to choose. There are pros and cons to adopting either of the currencies mentioned above, but the US dollar has the most credibility and is the most widely traded. Another suggestion to stop inflation is for Zimbabwe to join the special currency zone known as the Common Monetary Area, or "Rand Zone". The Rand Zone is a formal group of countries that collectively use one currency for better trade and stability. Zimbabwe could join this union of Lesotho, Namibia, South Africa, and Swaziland. A

currency union, like the Rand Zone, would allow openness and ideally boost the Zimbabwean economy which has slumped since the onslaught of hyperinflation. There exist a host of other solutions, but these are the most widely discussed and the most feasible. Currently Zimbabwe uses a combination of foreign currencies, but mostly US dollars. There is no coherent consensus on a specific course of action that Zimbabwe should embark on to curb hyperinflation. It is however clear that various scholars have identified fiscal tightening, that is the reduction of excessive money printing or supply as the principal process to eradicate if Zimbabwe is to eliminate hyperinflation successfully. A solution in its entirety has not been decided on as of 2011, and the economy is still in a slump.

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