Zimbabwe FAQ – why the hyperinflation? how do they fix it?
Posted on September 22nd, 2007 by Richard Catto 18,563 views
Why is Zimbabwe currently experiencing hyperinflation?
Zimbabwe is currently experiencing an inflation rate of over 7600% per annum. The crisis started in 2000 when the Zimbabwean government effectively destroyed their agricultural industry by displacing farmers from their lands.
Zimbabwe’s economy immediately went into recession and inflation began to rise.
So what did the Zimbabwean government do to try and correct this problem?
They printed more currency.
Why did they do that?
They had salaries to pay, projects to finance, things to buy. Just like everyone else they were suddenly faced with the crisis of having to pay much more for things, and they didn’t have enough, so they printed more money to cover it.
Is printing money a problem? Don’t governments do that all the time?
The reserve bank of a country prints currency. Current economic theory holds that an independent reserve bank is superior to a state owned bank. Independence means that they set monetary policy (without political interference) and they decide how much currency to print.
A prudent reserve bank will take care not to grow the money supply (physical currency) at a rate above the CPI inflation rate.
Zimbabwe’s Reserve Bank is state owned and the Governor, Dr Gideon Gono, has been ordered by Mugabe (on an ongoing basis over the years since 2000) to print amounts of currency that grow the money supply at a rate well over Zimbabwe’s inflation rate. Mugabe has in fact stated recently (in July 2007) that Zimbabwe will continue this practice of printing more currency as and when required.
This practice has led to hyperinflation.
How does printing more money cause hyperinflation?
Whenever money supply is increased (without a corresponding increase in the overall economy), the currency is debased. In other words, it loses value. So the cost of goods rise to counter this loss of value. If the supply of money increases above the inflation rate, the rate of inflation increases too.
Zimbabwe has been printing trillions of additional Zim dollars at a time when their economy has actually been contracting (quite rapidly). The punitive regulatory measures that Mugabe has imposed on traders (ordering that they fix their prices) has served only to increase the rate at which Zimbabwe’s economy contracts. So you have an ever increasing amount of currency chasing an ever shrinking amount of goods.
Why don’t they simply stop printing money?
If they do that, they won’t be able to pay government workers’ salaries which were recently hiked by 300% (which was an insufficient increase). They’ll default on all the things they have to pay for and they don’t want to deal with that scenario. They prefer to inflate their way out of their crisis.
Zimbabwe will immediately enter a deep depression if currency growth halts. Arguably, they are in one already, but they can still buy things with Zim dollars. If money supply growth is frozen, people simply won’t have enough currency to buy anything anymore.
If people cannot afford to buy anything, won’t prices come down?
Yes, but there are other problems. Mugabe has regulated the economy by barring businesses from raising their prices and in fact ordered them (in July 2007) to reduce prices by 50%, in an attempt to rein in inflation.
It is a losing proposition to businesses, so their alternatives have been to either defy Mugabe or to cease trading. Those who choose to defy him, are arrested. So damage is being done to whole business sectors and their supply chains. Whole industries will be wiped out if they are not free to set prices rationally.
That is the greater danger, that when the time comes that rational economic policies are applied, there will be no businesses left to respond. Confidence would have been completely lost and it will be difficult to lure the major chains back. Frankly, I don’t see a ZANU-PF government ever enjoying confidence again. Unless the people of Zimbabwe elect a new party to govern, Zimbabwe will not recover. They will remain a crippled country.
So what is the best strategy forward for Zimbabwe?
That’s the trillion dollar question. However, we do have Bolivia as an example. In 1985, they eliminated hyperinflation within a few months by enacting the following measures:
- they linked their currency to a stable foreign currency (in their case, the United States dollar)
- they froze government spending
- they stopped printing currency
- they lifted all price controls
- they deregulated their economy
Zimbabwe will most likely have to do all that and more. They could link their currency to the South African Rand like Namibia has done. The Namibian dollar is linked 1:1 to the Rand.
Zimbabwe also has to rebuild their agricultural sector.
Sources:
Bolivia
TIMELINE: Chronology of Zimbabwe’s economic crisis
A non-currency country
The World’s Greatest Unreported Hyperinflation
Tags: gono, Hyperinflation, mugabe, Zimbabwe
Filed under Hyperinflation |
15 Responses to “Zimbabwe FAQ – why the hyperinflation? how do they fix it?”
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Richard Catto Says:
September 22nd, 2007 at 18:47Essentially, the Zimbabwean people voted for this to happen to themselves. They elected a government which was bad. They decided not to respect property rights. They decided to disrespect their courts. They decided that freedom of speech and a free media were unimportant. They decided that they were not the cause of the problem – some other people, over there were.
I read a young Zimbabwean journalist online[1] who stated his opinion that hyperinflation is being fueled by the greed of business people, inflating their prices to make exorbitant profit. The journalist is incompetent. Despite his education (he’s enrolled in a masters degree in a Canadian university), he fails to understand the reasons behind the economic failure that is occurring in Zimbabwe. But I think he simply does not wish to.
His incompetence (as a journalist to accurately report what is happening) is an example of the widespread incompetence in Zimbabwe which is the root cause of the current crisis. Either Zimbabweans will learn how to correctly analyse the situation and address the real issues, or they will become extinct.
I say, “Let no man help them until they are willing to admit that they need help and ask for it.” And then they must be willing to accept conditions along with that help.
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Gus Gobel Says:
September 26th, 2007 at 08:13Some months ago the Sunday Times had a massive front page banner. ZIMBABWE COLLAPSES.
We keep hearing how the country is in ruins etc. etc. Yet, when Mugabe appears in public he is
lionised by his African brothers as a hero. They must surely know something we do not about his country. Leave the Zimbabweans alone to get on with their lives, like you say they alone are responsible for their situation. -
Richard Catto Says:
September 26th, 2007 at 08:35Zimbabwe has collapsed. Their economy is busy shutting down. People are running on empty. People walk to work because the amount they earn cannot even pay their transport there and back. What they earn does not pay their bills anymore.
In South Africa, transport to work costs the average employed person less than 5% of what they earn.
What counts as collapse in your book? When everyone is dead?
Mugabe is so paranoid now that he has every single visitor searched for arms before they see him. He has already had one coup plot squashed before it started.
When I researched this article, I read a lot of articles, far more than the ones I have referenced above. If you read more on this subject, you will discover that the situation is extremely grave. I’m not sure people can hold out until the end of the year, let alone next year when elections are to be held.
You can expect to get a lot more Zimbabwean refugees pouring into South Africa because they need to EAT. There is NO FOOD in Zimbabwe. NO FOOD. NO PETROL. There is NOTHING in the shops. NOTHING.
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Inside Candy » Zimbabwe FAQ - why the hyperinflation? Says:
October 16th, 2007 at 12:52[...] read more | digg story [...]
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Guy McLaren Says:
October 17th, 2007 at 16:12this blog has been nominated
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Nyagura Says:
December 2nd, 2007 at 20:08Hey Zim’s situation is a bit more complex than anyone can imagine. EVERY outsider will quickly conclude that Mugabe is causing the rapid inflation whilst every patriot will attribute that to some sabotage by western powers as a result of the distribution of land to the landless. Does anyone know the conditions of the Lancaster House Conference. If you don’t then you are probably not qualified to comment about Zimbabwe.
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Philip De Groot Says:
December 17th, 2007 at 00:51Nyagura
Are you implying that Robert Mugabe has not taken the law into his own hands. Are you implying that there are foreign or domestic political forces at work in Zimbabwe preventing Robert Mugabe from sorting out his countries economic troubles? I was not at the Lancaster House Conference but I remember it. What conditions do you think the Lancaster House Conference created that could explain Zimbabwe’s current situation.
What portion of Zimbabwe’s arable land suitable for food production is not in the hands of small hold farmers. This is an important question because the sandy soils that support Tobacco production do not support most food crops. Israel has managed to farm deserts largely by treating them as a medium for hydroponics. This requires access to a lot of fresh water and large capital investment. -
Uwe Says:
June 5th, 2008 at 19:58Richard:
I like your article, and I agree that Zim has collapsed. A while ago already. And I admit that I probably know not even half about the situation, living far away in the US.
But I would not necessarily say that the people voted for this. Yes, technically and officially they did. But look at the former GDR (Eastern Germany): They ruling party consistently had 95% and more of the votes. But if 95% approved of that situation then, the Berlin Wall would still be up and they still wouldn’t be able to buy bananas and blue jeans.
My point: Once Mugabe had the power, he made sure he could keep it. Arresting, beating, maybe killing people that could endanger his power. Before I get my bones broken, I’d probably rather vote for someone I don’t like.
And I don’t think the people are too dumb too analyze the situation. Yes, there may be a large number that don’t see the connections. That’s the same everywhere. Pick ten random people in any country, and I bet at least half can’t even explain properly what inflation is.
Mugabe shows the principal-agent problem that is talked about in economics 101: He doesn’t care about the rest. Like most politicians don’t, quite frankly, but to different degrees. They tell everything to get votes, and use any available means to cling on to their power. In functioning democracies maybe less violent and more through legal loopholes, and in non-functioning governments through violence and creating your own laws.
Then people often don’t have much choice, and I think nobody appreciates the current situation, though most wouldn’t know what to do about it. And most probably didn’t anticipate this coming some 30 years ago. -
Richard Catto Says:
June 5th, 2008 at 23:27@Uwe: Mugabe enjoyed the support of the majority of Zimbabwe’s people until the most recent election. The Zim people mostly believed Mugabe’s bullshit, whilst their daily lives were relatively unaffected, but when people can no longer buy food or petrol, confidence in the ruling party is quickly lost and that is why Zanu-PF and Mugabe lost the recent elections.
I agree that most people do not understand how economics works and that is why I wrote this article to attempt to explain in simple terms what went wrong and how it can be fixed.
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john anderson Says:
July 22nd, 2008 at 22:15The sooner that someone melts robert mugabe down, and makes him into something more useful like a car tyre or a pair of wellington boots the better. May the people of Zimbabwe know peace one day soon
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Richard Catto Says:
July 22nd, 2008 at 22:30@john anderson: You wish. Mugabe is gonna cling to power until he dies, it seems. And I had high hopes earlier this year that he would be out.
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Bl1nD Says:
October 24th, 2008 at 15:32can i know what happen with zimbabwe in hyperinflation…?? this for my college project…tq.
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Richard Catto Says:
October 24th, 2008 at 16:02@Bl1nD: You need to do your own research just as I did for this article.
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Bernard Says:
October 29th, 2008 at 05:39What The fuck man , They still Killin each other for FOOD !!!!! And obviously it was the governor fault. What a Unneglected Future.!!!!!
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Ed Says:
December 1st, 2008 at 23:01“Quote” – Zimbabwe’s neighbours should close their borders in an attempt to bring down President Robert Mugabe, Botswana’s foreign minister said on Wednesday in the strongest call yet for action from Africa.
Foreign Minister Phandu Skelemani told BBC World News television that southern African nations have failed to move Mugabe with mediation and they should now impose sanctions.
The leaders should “tell Mugabe to his face, ‘Look, now you are on your own, we are switching off, we are closing your borders,’ and I don’t think he would last. If no petrol went in for a week, he can’t last”, Skelemani said.
Zimbabwe’s government made no immediate comment.
Botswana and Zambia have been lonely African voices against Mugabe as Zimbabwe has undergone an economic and political crisis in which agriculture, health and education services have collapsed and shortages of food, clean water, medicine, electricity and fuel have become routine.
South Africa began taking a harder line last week, announcing it was withholding R30m in agricultural aid until Mugabe forms a coalition government with the opposition.
It still appears unlikely to heed Botswana’s call for a closure of its border, the lifeline for landlocked Zimbabwe, for fear of creating a wider humanitarian crisis.
An outbreak of cholera among hundreds of Zimbabweans has spread to South Africa and Botswana in recent weeks.
South Africa is hosting a new round of talks aimed at getting Zimbabwe’s rival parties to agree on wording of a constitutional amendment that would form the legal basis for a unity government with opposition leader Morgan Tsvangirai as prime minister.
But opposition sources said on Wednesday the two sides cannot even agree on what to discuss and are meeting “without prejudice” – meaning nothing binding will result. “End quote”
You can take the monkey out the bush . . . but thats it.
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