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Hyperinflation Analysis in Zimbabwe Essay

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Updated: Dec 13th, 2021

The people of Zimbabwe have been experiencing a tumultuous economic period from the beginning of the century. Currently, they hold the world record for the highest inflation rates in this decade. News reports from that country often indicated cases of people paying thirty million Zimbabwean dollars for a loaf of bread or thirty three million for a one way bus ticket to work yet these passengers had to set aside extra funds in the event of a price increase while still on the bus. The essay shall look at the magnitude of the problem, what caused the problem and economic situations that propagated it.

Extent of the Problem

The Zimbabwean government struggled with a myriad of problems. First, the country’s fiscal deficit has spiralled out of the control. Statistics in 2009 indicated that the percentage of public debt that the country owes its debtors is two hundred and fifty one percent of its gross domestic product. On top of the latter, its exchange rate had been overvalued (there are dramatic differences between estimates made by the government and those in operation in the black market; for example, the government would report that Zimbabwe’s exchange rate with the US dollar is thirty thousand yet in the black market, it might actually be eight hundred thousand. Its hyperinflation case hit the ceiling- at its worst in 2008, the inflation rate was 11.2 million percent and this was a dramatic increase from twenty six thousand percent in 2007 (Hanke, 15). A country which used to be a net exporter is now a heavy importer of commodities that relies on foreign nations for even the simplest goods. Most of its citizenry heavily depend on aid from non confrontational countries since Zimbabwe’s relationship with the UK and the World Bank has deteriorated tremendously after it demonstrated an unwillingness to enact policy reforms. In response to these plummeting inflation rates, the black market has flourished tremendously. Most people actually rely on the latter for a fairly accurate indication of how the monetary situation is faring since the government cannot be relied to do this; it has been resorting to such unscrupulous tactics to hide the extent of the problem. Eventually in 2009, the government opted to introduce the use of US dollars as substitutes for Zimbabwean bearer checks which were also substitutes for real printed money after chronic inflation had hit the country.

Events That Triggered Zimbabwe’s Hyperinflation

An overview of Zimbabwe’s economic productivity indicates that approximately sixty six percent of the GDP emanates from the agricultural sector while twenty four percent is from the services sector and ten percent from industrial sector. However, the agricultural sector was the object of the notorious land reforms carried out by its current President Robert Mugabe. In an attempt to restore black majority rule, Mugabe opted to chase out all white land owners and offered their property to blacks who had very little experience and expertise in commercial or large scale farming. Therefore the country quickly started experiencing food shortages which eventually spiralled out of control and which put the country in a situation where only foreign intervention could save the day. Prior to these land reforms, the agricultural sector provided approximately four hundred thousand jobs and was essentially the major exporter of goods in the country.

Other analysts assert that the economic crisis was triggered by poor choices in political an international matters. The country had spent too much of its time and resources in Congo’s war (this ended in 2004) thus causing hundred of millions of dollars worth of losses to their economy. This has also been coupled by bad governance, injustice and failed elections. In 2008, the country carried out a much publicised election which saw the re-election of Robert Mugabe (albeit unfairly). This further undermined confidence in Zimbabwe’s economic system and eventually led to further alienation by the international community.(Hanke, 13)

Economic Analysis

There are a series of economic models that can be used to unravel the issues that led to Zimbabwe’s inflationary problem. At the heart of all these models lies the fact that either the money velocity or money supply in this African nation may have been inadequate. In the confidence model, adherents believe that people of this nation lost confidence in the government and the Reserve bank of Zimbabwe. These individuals felt that their authorities would be solvent and so opted to spend their currency out of a fear of devaluation. Instead of dealing with this lack of confidence, the latter government resorted to short term measures such as increased circulation. What this led to was even more vigorous inflationary rates.

The monetary model of inflation holds that the Reserve bank of Zimbabwe engaged in expansionary money tactics or rapid distribution of money in order to cover some of its plummeting costs after dwindling exports especially from the agricultural sector. Its citizens eventually got wind of this tactic and therefore decided to alter the prices of their commodities so as to make up for the losses that they would undergo because of the impeding decrease in value of the currency. The government then responded to these rises by also increasing money supply and the value of the Zimbabwean dollar therefore kept plummeting. (Sheffrin, 33)

Both these models adhere to the notion that the rate of increase of money supply either outpaced or was outpaced by the rate of money transfer or velocity of money. In Zimbabwe (much like any other country in the world going through hyper inflation), there was an increased supply of money without necessarily considering the demand for that money. To that end, its value relative to others in the international market fell. The citizens of this nation were trapped in an endless cycle where they wanted to quickly spend the money they had before its value diminished further and they lost their purchasing power. This means that the velocity of money became so high to the point of reaching catastrophic levels. This country was not enjoying one of the principle functions of money which is to be a store of value. In fact, after a long battle with the latter problem, the country eventually decided to accept the institution of another currency to operate within its borders i.e. the US dollar in 2009 as other strategies such as price controls cannot be economically viable. When the latter country tried to control the prices of certain commodities, it failed miserably. This was because of the simple rules of supply and demand. Since the commodities were controlled, then there was a high demand for the products. Shortages were experienced and the supply chain could not respond to the needs of its consumers. To this end, a number of commodities disappeared off the shelves of their supermarkets and shops since business men did not see any logic in selling unprofitable commodities. The crisis was therefore propagated because of these controls. (Cagan, 98)

Conclusion

The extent of Zimbabwe’s hyperinflation has reached record highs in recent times. This can be blamed on Mugabe’s government and its Reserve bank which continued engaging in expansionary monetary tactics that caused an oversupply of money without complementary rise in economic output. Furthermore, political miscalculations caused the country’s populace to mistrust their governing institutions thus perpetuating the problem.

References

Greenspan, Allan. The age of turbulence. NY: Penguin publishers, 2007

Hanke, Steven. Zimbabwe’s hyperinflation rare now at 89.7 sextillion percent. Cato institute, 2008

Hanke, Steven. “Zimbabwe from hyperinflation to growth.” Development policy analysis 3(2009): 6

Sheffrin, Steve. Economics principles in action, NJ: Pearson, 2003

Cagan, Phillip. Dynamics of hyperinflation. NY: Prentice hall, 2002

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