Description
the concept of inflation and hyperinflation and how hyperinflation gripped Zimbabwe and its impact on Zimbabwaen economy.
Zimbabwe economic Crisis
Contents
? Inflation
? Hyperinflation
? Zimbabwean Context
? Reasons for the Collapse : Political and Economical ? International Community ? Suggestions ? References
Inflation
? Persistent increase in general price level over time
? Inflation rate =
(current price level ? year ago price level)*100 / year ago price level
Inflation – Types
Demand Pull Inflation
Increase in the aggregate demand ? Reasons:
?
? Increase in the money supply ? Increased government spending
Aggregate Demand and Price Levels
Cost Push Inflation
Decrease in the aggregate supply ? Reasons:
?
? Increase in the real price of an important factor of production like wages, energy etc
Aggregate Demand and Price Levels
Built-in inflation
? Induced by expectations often linked to
“price/wage” spiral ? Workers try to keep their wages up ? Employers pass their high costs to customers as higher prices ? Vicious Circle
Rational Expectations Theory
? It says that economic actors look rationally into the
future when trying to maximise their well-being, and do not respond solely to immediate opportunity costs and pressures ? Market participants will seek to “head off” centralbank decisions by acting in ways that fulfil predictions of higher inflation
Inflation – Necessary Evil
? Pros ? To renegotiate some prices, and particularly wages, downwards - easier for relative prices to adjust ? Efforts to attain complete price stability can also lead to deflation - keep an economy
? Cons • Reduce long-term capital formation by hurting the incentive to save, and to effectively reduce long-term spending by making products less affordable • Hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation
Consequences of Inflation
HYPERINFLATION
? Defined as a rapid and unchecked increase in the price
level ? usually greater than 100% or 1000% ?Reported per month or even per day ?Implies that inflation is out of control
? Not only prices are increasing rapidly but the rate of increase is
rising rapidly as well
?Examples:
?Hungary ,July 1946, 4.19 quintillion percent (4,190,000,000,000,000,000 %)
?Yugoslavia ? Oct 1993 to Jan 1995 - 5 quadrillion per cent
Literature
? In neo-classical economic theory, hyperinflation is rooted in a
deterioration of the monetary base; that is the confidence that there is a store of value which the currency will be able to command later. The perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. This is akin to trading cash with no apparent economic activity
Causes: ? Large government debt, usually over 100% of GDP ? Printing Money ? Reluctance / inability to deal with it Costs: ? Value of savings falls ? Menu Costs ? Lack of Confidence in the Finance Sector ? Lack of Investment and Economic Growth
In Zimbabwe
2009 8 out of 10 people are unemployed Richest and most developed countries in the African Continent 80% of the population live in poverty Known as bread basket of Africa Hyperinflation Zimbabwean Dollar considered to World’s worst economies be among the highest valued Lowest GDP growth rate in an currency units independent country Shortage of hard currency, fiat currency, fuel, medicine, and food 1980
Reasons for the collapse
Highly inefficient and corrupt government ? Land reforms ? Sanctions imposed by other countries ? Foreign Exchange Shortages ? Maintenance of unrealistic price controls on a wide range of products including food, fuel, soap etc ? Interference with judiciary
?
The Government
?
Robert Mugabe
? Prime minister from 1980-87 President since 1987 ? A Freedom fighter - His goal was to replace white minority-rule with a one-party Marxist regime ? An African hero ? Initially promised to be fair to all the people, black and white
?
Since 1998, his policies have been condemned both at home and abroad ? Though Zimbabwe was in a severe economic crisis, he sent troops to fight in the Congo war (1998-2002 ) ? Expropriated thousands of white-owned farms ? Printed hundreds of trillions of Zimbabwean dollars ? War veterans were paid Z$5 Billion in the year 2000
Budget Deficit in 2001 was around 18%. ? To fund the budget deficit, RBZ routinely prints money causing the official annual inflation rate to rise ? 32% in 1998 ? 133% in 2004 ? 1000% in 2006 ? 26000% in 2007 ? Much government spending is on salaries and expenditure in nonproductive sectors to maintain Mugabe’s patronage system
?
Need for Land reforms
White minority (British Colonial Rulers) - 5 % of the population -owned 80% of the lands ? Majority native Africans were left to scrape a living on the remaining, mostly un-arable, overcrowded common lands ? Hence, the need to redistribute land
?
Why the reforms failed?
Land Transferred to inexperienced and incompetent managers
Reduction in agricultural output
Loss of agricultural Financing
Loss of market Confidence
Buyouts ceased after it was found out land was being handed to those close to Mugabe ? Soon thereafter, land was simply seized by Mugabe's government ? Hence, the commercial farming sector, the traditional source of exports and foreign exchange and the provider of 400,000 jobs, was badly damaged. ? Zimbabwe turned into a net importer of food products
?
Also..
? ? ? ?
Economic aid from donors like IMF became limited Financial institutions began withdrawing support The EU terminated its support for all projects in Zimbabwe None of Zimbabwe's debts have been cancelled as in other countries ? Feb 2004: Zimbabwe's foreign debt repayments ceased, resulting in compulsory suspension from the (IMF) ? Forced the government into borrowing from local sources
Sanctions
Price Controls
Reserve Bank of Zimbabwe declared inflation illegal!! ? Shopkeepers were forced to sell goods at a loss ? Hundreds of shopkeepers were arrested for noncompliance ? Result: Basic goods are no longer available
?
Foreign Exchange Shortages
Zimbabwe’s participation in the Congo War used up all of its foreign exchange earnings ? Situation Worsened due to the difference between the official rate and the black market rate ? Auctioning scarce foreign currency for importers was introduced. It only gave a temporary relief ? Persistent shortage led to fuel shortage in 1999 ? Fuel prices were increased by 74% in 2001 ? Hike in bus fares and basic essentials including food followed ? Despite the shortage, Government pegged the exchange rate
?
Causes in Zimbabwean context has assumed an important role as far as financing ? Money printing
? ? ? ? ?
government’s expenditure activities Absence of central bank independence (in practice) Foreign currency black market exchange rate (mainly US dollars) and its resultant black market premium. Nominal interest rates External debt Politics and violence
In Zimbabwe
?
Statistics:
? ? ? ?
1980 : USD $1.45 = ZWD $1 2000 : USD $1 = ZWD $1000 2006 : USD $1 = ZWD $500,000 2008 : USD $1 = ZWD $18,700,000,000
? ? ? ?
?
Government spending is 56.4% of GDP State enterprises are strongly subsidized Taxes and tariffs are high Monetary authority irresponsibly borrowing money to pay all its expenses and funding quasi-fiscal activities (which are normally left to Central Government) Results from long run and shot run econometric models shows money supply, black market for foreign exchange (US$) and lagged values of hyperinflation to be positively correlated with the country’s hyperinflation trend
Evolution of the Zimbabwean Dollar
First
„ 1980 „ ZWD 1 = USD 1.47 „ Operation Sunrise in 2006 „ 1 Revalued dollar = 1000 old dollars „ Government devalued the dollar by 60% against Second the US dollar from 101,000 old dollars (101 revalued) to 250 revalued dollars
Third
„ 2008 : 1 revalued dollar = 10 Billion old dollars „ New Currency code of ZWR
Evolution (contd)
Finally, the dollar was abandoned on 12 Apr 2009 ? Reserve Bank of Zimbabwe legalised the use of foreign currencies for transactions in Jan 2009 ? South African Rand, Botswana Pula and United States Dollar are widely used
?
International Community
Zimbabwe is under pressure from most of the countries to stop its human rights violating activities ? This has led to breaking of trade relations with most of the countries of the world ? South Africa and China are the only countries with a large stake in Zimbabwe’s trade ? In 1991, IMF and the World Bank sponsored a Structural Adjustment Plan ? Rather than reduce spending on the military and patronage, the government cut spending on health and education ? Hence, they suspended their support
?
Zimbabwe’s partner - China
• •
•
•
•
Their relation dates back to 1979 when ZANU got support from China Mugabe places great importance on Zimbabwe's relations with China, especially after the 2003 standoff with the European Union resulted in capital flight and economic depression China does not interfere in internal affairs such as human rights issues China is biggest buyer of Zimbabwe’s tobacco China is supplier of agricultural equipment as well as arms to Zimbabwe
South Africa Vs Zimbabwe
?
The similarities ? Got independence from the ruling whites ? Problem of land hunger ? Violence against white land owners ? Corruption
How are they different
•
Land issues – In South Africa government used power of the state to protect property rights – No evidence of South African government (or the provincial governments) supporting land invasions – Zimbabwe land invasions by government supporters than by oppressed poor – Extensive research being done on land needs in South Africa – Land hunger in South Africa is more in urban areas
Politics and violence – Political violence has come down drastically in South Africa – Free and fair elections in South Africa as compared to rigged elections in Zimbabwe • Courts and Media – Judiciary is autonomous is South Africa as compared to an autonomous parliament in Zimbabwe – South Africa has private media which can give its own opinions – Media in Zimbabwe is mostly state controlled
•
What needs to be done
Free and fair elections ? International Financial Institutions must resume negotiations on Land reforms ? Zimbabwe need to seriously reduce its money supply central bank is given autonomy ? Drive to stimulate exports is complicated by overvalued fixed exchange rate ? better policies
?
What needs to be done (contd)
?
Lagged values of hyperinflation have a significant long run and short-run influence on current hyperinflation ameliorate hyperinflationary trend, otherwise expectations ? Need to improve its political environment across the spectrum, from international relations, internal governance (perceived fair legal environment), and restoration of all the basic human rights
References
? ? ?
http://www.opednews.com/articles/The-event-thatcaused-the-by-Grant-McIntire-090505-911.html http://www.crisisgroup.org/library/documents/report _archive/A400356_13072001.pdf www.nationmaster.com
doc_591056707.pptx
the concept of inflation and hyperinflation and how hyperinflation gripped Zimbabwe and its impact on Zimbabwaen economy.
Zimbabwe economic Crisis
Contents
? Inflation
? Hyperinflation
? Zimbabwean Context
? Reasons for the Collapse : Political and Economical ? International Community ? Suggestions ? References
Inflation
? Persistent increase in general price level over time
? Inflation rate =
(current price level ? year ago price level)*100 / year ago price level
Inflation – Types
Demand Pull Inflation
Increase in the aggregate demand ? Reasons:
?
? Increase in the money supply ? Increased government spending
Aggregate Demand and Price Levels
Cost Push Inflation
Decrease in the aggregate supply ? Reasons:
?
? Increase in the real price of an important factor of production like wages, energy etc
Aggregate Demand and Price Levels
Built-in inflation
? Induced by expectations often linked to
“price/wage” spiral ? Workers try to keep their wages up ? Employers pass their high costs to customers as higher prices ? Vicious Circle
Rational Expectations Theory
? It says that economic actors look rationally into the
future when trying to maximise their well-being, and do not respond solely to immediate opportunity costs and pressures ? Market participants will seek to “head off” centralbank decisions by acting in ways that fulfil predictions of higher inflation
Inflation – Necessary Evil
? Pros ? To renegotiate some prices, and particularly wages, downwards - easier for relative prices to adjust ? Efforts to attain complete price stability can also lead to deflation - keep an economy
? Cons • Reduce long-term capital formation by hurting the incentive to save, and to effectively reduce long-term spending by making products less affordable • Hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation
Consequences of Inflation
HYPERINFLATION
? Defined as a rapid and unchecked increase in the price
level ? usually greater than 100% or 1000% ?Reported per month or even per day ?Implies that inflation is out of control
? Not only prices are increasing rapidly but the rate of increase is
rising rapidly as well
?Examples:
?Hungary ,July 1946, 4.19 quintillion percent (4,190,000,000,000,000,000 %)
?Yugoslavia ? Oct 1993 to Jan 1995 - 5 quadrillion per cent
Literature
? In neo-classical economic theory, hyperinflation is rooted in a
deterioration of the monetary base; that is the confidence that there is a store of value which the currency will be able to command later. The perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. This is akin to trading cash with no apparent economic activity
Causes: ? Large government debt, usually over 100% of GDP ? Printing Money ? Reluctance / inability to deal with it Costs: ? Value of savings falls ? Menu Costs ? Lack of Confidence in the Finance Sector ? Lack of Investment and Economic Growth
In Zimbabwe
2009 8 out of 10 people are unemployed Richest and most developed countries in the African Continent 80% of the population live in poverty Known as bread basket of Africa Hyperinflation Zimbabwean Dollar considered to World’s worst economies be among the highest valued Lowest GDP growth rate in an currency units independent country Shortage of hard currency, fiat currency, fuel, medicine, and food 1980
Reasons for the collapse
Highly inefficient and corrupt government ? Land reforms ? Sanctions imposed by other countries ? Foreign Exchange Shortages ? Maintenance of unrealistic price controls on a wide range of products including food, fuel, soap etc ? Interference with judiciary
?
The Government
?
Robert Mugabe
? Prime minister from 1980-87 President since 1987 ? A Freedom fighter - His goal was to replace white minority-rule with a one-party Marxist regime ? An African hero ? Initially promised to be fair to all the people, black and white
?
Since 1998, his policies have been condemned both at home and abroad ? Though Zimbabwe was in a severe economic crisis, he sent troops to fight in the Congo war (1998-2002 ) ? Expropriated thousands of white-owned farms ? Printed hundreds of trillions of Zimbabwean dollars ? War veterans were paid Z$5 Billion in the year 2000
Budget Deficit in 2001 was around 18%. ? To fund the budget deficit, RBZ routinely prints money causing the official annual inflation rate to rise ? 32% in 1998 ? 133% in 2004 ? 1000% in 2006 ? 26000% in 2007 ? Much government spending is on salaries and expenditure in nonproductive sectors to maintain Mugabe’s patronage system
?
Need for Land reforms
White minority (British Colonial Rulers) - 5 % of the population -owned 80% of the lands ? Majority native Africans were left to scrape a living on the remaining, mostly un-arable, overcrowded common lands ? Hence, the need to redistribute land
?
Why the reforms failed?
Land Transferred to inexperienced and incompetent managers
Reduction in agricultural output
Loss of agricultural Financing
Loss of market Confidence
Buyouts ceased after it was found out land was being handed to those close to Mugabe ? Soon thereafter, land was simply seized by Mugabe's government ? Hence, the commercial farming sector, the traditional source of exports and foreign exchange and the provider of 400,000 jobs, was badly damaged. ? Zimbabwe turned into a net importer of food products
?
Also..
? ? ? ?
Economic aid from donors like IMF became limited Financial institutions began withdrawing support The EU terminated its support for all projects in Zimbabwe None of Zimbabwe's debts have been cancelled as in other countries ? Feb 2004: Zimbabwe's foreign debt repayments ceased, resulting in compulsory suspension from the (IMF) ? Forced the government into borrowing from local sources
Sanctions
Price Controls
Reserve Bank of Zimbabwe declared inflation illegal!! ? Shopkeepers were forced to sell goods at a loss ? Hundreds of shopkeepers were arrested for noncompliance ? Result: Basic goods are no longer available
?
Foreign Exchange Shortages
Zimbabwe’s participation in the Congo War used up all of its foreign exchange earnings ? Situation Worsened due to the difference between the official rate and the black market rate ? Auctioning scarce foreign currency for importers was introduced. It only gave a temporary relief ? Persistent shortage led to fuel shortage in 1999 ? Fuel prices were increased by 74% in 2001 ? Hike in bus fares and basic essentials including food followed ? Despite the shortage, Government pegged the exchange rate
?
Causes in Zimbabwean context has assumed an important role as far as financing ? Money printing
? ? ? ? ?
government’s expenditure activities Absence of central bank independence (in practice) Foreign currency black market exchange rate (mainly US dollars) and its resultant black market premium. Nominal interest rates External debt Politics and violence
In Zimbabwe
?
Statistics:
? ? ? ?
1980 : USD $1.45 = ZWD $1 2000 : USD $1 = ZWD $1000 2006 : USD $1 = ZWD $500,000 2008 : USD $1 = ZWD $18,700,000,000
? ? ? ?
?
Government spending is 56.4% of GDP State enterprises are strongly subsidized Taxes and tariffs are high Monetary authority irresponsibly borrowing money to pay all its expenses and funding quasi-fiscal activities (which are normally left to Central Government) Results from long run and shot run econometric models shows money supply, black market for foreign exchange (US$) and lagged values of hyperinflation to be positively correlated with the country’s hyperinflation trend
Evolution of the Zimbabwean Dollar
First
„ 1980 „ ZWD 1 = USD 1.47 „ Operation Sunrise in 2006 „ 1 Revalued dollar = 1000 old dollars „ Government devalued the dollar by 60% against Second the US dollar from 101,000 old dollars (101 revalued) to 250 revalued dollars
Third
„ 2008 : 1 revalued dollar = 10 Billion old dollars „ New Currency code of ZWR
Evolution (contd)
Finally, the dollar was abandoned on 12 Apr 2009 ? Reserve Bank of Zimbabwe legalised the use of foreign currencies for transactions in Jan 2009 ? South African Rand, Botswana Pula and United States Dollar are widely used
?
International Community
Zimbabwe is under pressure from most of the countries to stop its human rights violating activities ? This has led to breaking of trade relations with most of the countries of the world ? South Africa and China are the only countries with a large stake in Zimbabwe’s trade ? In 1991, IMF and the World Bank sponsored a Structural Adjustment Plan ? Rather than reduce spending on the military and patronage, the government cut spending on health and education ? Hence, they suspended their support
?
Zimbabwe’s partner - China
• •
•
•
•
Their relation dates back to 1979 when ZANU got support from China Mugabe places great importance on Zimbabwe's relations with China, especially after the 2003 standoff with the European Union resulted in capital flight and economic depression China does not interfere in internal affairs such as human rights issues China is biggest buyer of Zimbabwe’s tobacco China is supplier of agricultural equipment as well as arms to Zimbabwe
South Africa Vs Zimbabwe
?
The similarities ? Got independence from the ruling whites ? Problem of land hunger ? Violence against white land owners ? Corruption
How are they different
•
Land issues – In South Africa government used power of the state to protect property rights – No evidence of South African government (or the provincial governments) supporting land invasions – Zimbabwe land invasions by government supporters than by oppressed poor – Extensive research being done on land needs in South Africa – Land hunger in South Africa is more in urban areas
Politics and violence – Political violence has come down drastically in South Africa – Free and fair elections in South Africa as compared to rigged elections in Zimbabwe • Courts and Media – Judiciary is autonomous is South Africa as compared to an autonomous parliament in Zimbabwe – South Africa has private media which can give its own opinions – Media in Zimbabwe is mostly state controlled
•
What needs to be done
Free and fair elections ? International Financial Institutions must resume negotiations on Land reforms ? Zimbabwe need to seriously reduce its money supply central bank is given autonomy ? Drive to stimulate exports is complicated by overvalued fixed exchange rate ? better policies
?
What needs to be done (contd)
?
Lagged values of hyperinflation have a significant long run and short-run influence on current hyperinflation ameliorate hyperinflationary trend, otherwise expectations ? Need to improve its political environment across the spectrum, from international relations, internal governance (perceived fair legal environment), and restoration of all the basic human rights
References
? ? ?
http://www.opednews.com/articles/The-event-thatcaused-the-by-Grant-McIntire-090505-911.html http://www.crisisgroup.org/library/documents/report _archive/A400356_13072001.pdf www.nationmaster.com
doc_591056707.pptx