Zimbabwe in crises

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  • 30% of foreign exchange earnings to govt. official at an artificial exchange rate (2005)
  • iron, nickel, platinum, coal, chrome, asbestos, diamonds, tantalite, coalbed methane, and gold.Zimbabwe has more than 6,000 recordeddeposits and the capacity to produce at least25 tons of gold annually.In 2006, for example, coal productiondropped to its lowest level since 1946
  • Annual foreign earnings from tourism were less than one-tenth of what they were decade ago
  • n economics, hyperinflation is inflation that is very high or "out of control", a condition in which prices increase rapidly as a currency loses its value.[1]Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to "inflation exceeding 50% a month." [2] In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.
  • The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power.Her forign currency used is south african rand and now even the local shopkeepers have stopped accteptingzimbabwe dollar. The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency.
  • Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short.
  • Interest rates, wages and prices are linked to a price index 
  • the cumulative inflation rate over three years approaches, or exceeds, 100%.
  • 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.
  • In February 2007, the central bank of Zimbabwe declared inflation "illegal", outlawing any raise in prices on certain commodities between March 1 and June 30, 2007. Officials arrested executives of some Zimbabwean companies for increasing prices on their products. Such measures, frequently tried during other episodes of hyperinflation, have always failed.six-month freeze on wages on September 1, 2007
  • Printing more and higher denomination currency and therefore zwd loosing its value
  • they linked their currency to a stable foreign currency (in their case, the United States dollar)they froze government spendingthey stopped printing currencythey lifted all price controlsthey deregulated their economy
  • RBZ’s money machine is the main source of hyperinflation.RBZ has no ability to resist the Government’s demand for cash.RBZ finances the Government expenditure by simply printing money.
  • To restore stability and growth the monetary system has to replaced. The three ways are: Dollarization Currency BoardFree Banking
  • When the natives uses any foreign currency extensively alongside or instead their own currency/// legal tender???offered payment that by law cannot be refused in the settlement of the debt…..Unofficial Dollarization Semi Official DollaizationOfficial Dollarization when foreign currency has a full status of legal tender
  • An officially dollarized country imports the monetary policy of the country whose currency they have chosen. E.g. Panama and U.S.Due to the arbitrage the prices of goods are in a narrow range.Interest rates, Inflation etc are similar to that of the selected country. Examples: Ecuador, El Salvador, Panama etc.
  • US DOLLARS ($)Fully ConvertibleInflation and Real Interest rates are low and stable.EURO (€)High credibilityFull convertibilityLow interest rates and inflation.Most of the African countries do business more with Europe than with US.
  • randsSouth Africa is the largest trading partner of Zimbabwe.Many expatriates are already living in S.A.Unlike US $ and Euro it has exchange controls.(exc. Control provide greater stabilitybcoz it limits the volatility due to currency in/out flow)There can be an unified currency zone which includes S.A., Namibia, Lesotho, Swaziland
  • Advantages: CB are successful in promoting fiscal discipline, low inflation , economic growth and financial integration.CHARACTERISTICS:No active role in determining the monetary base.Money Supply is controlled by the market forces.Not allowed to influence the money supply e.g. cannot impose CRR etc on commercial banks.Lack of dominance of Government as they are situated in other country
  • The Zimbabwean Dollar is fully backed by a foreign reserve currency and is fully convertible at a fixed rate of demand.To maintain the elasticity in money supply they acquire reserves.Successful examples: Argentina(1991-2002), Estonia(1992) and Lithonia(1994).
  • FREE BANKING SYSTEM (a system where issue of notes etc are )No Central BankNo lender of last resortNo reserve requirementsNo restrictions on bank portfolio’s interest rate or branch banking
  • Zimbabwe in crises

    1. 1.
    2. 2.
    3. 3.
    4. 4. Bread Basket of Africa<br />
    5. 5.
    6. 6.
    7. 7.
    8. 8.
    9. 9. UNEMPLOYMENT<br />
    10. 10. AIDS<br />AIDS<br />
    11. 11. REASONS THAT LED TO THE CRISIS<br />
    12. 12. GDP<br />
    13. 13. AGRICULTURE<br />60% Labor force<br /><ul><li>Wheat
    14. 14. Tobacco</li></li></ul><li>Wheat Production<br />300,000 tons in 1990 to less than 50,000in 2007<br />
    15. 15. Tobacco<br />Responsible for 1/3rd exchange earnings<br />US$600 million in 2000 generated less than US$125 million in2007<br />
    16. 16. MANUFACTURING<br />Economic Structural Adjustment Program (ESAP) failure:<br /><ul><li>No foreign aid
    17. 17. Local borrowings
    18. 18. Restrictions on exchange earnings
    19. 19. Price control policy(2007)</li></li></ul><li>
    20. 20. MINING<br />Lowest ever coal production in 2006 since 1946<br />6,000 deposits<br />25 tons gold annually <br />
    21. 21. GOLD<br />
    22. 22. TOURISM<br /><ul><li>Victoria Falls
    23. 23. Game reserves
    24. 24. Stunning mountains
    25. 25. Wonderful climate.</li></li></ul><li>
    26. 26. TOURISM<br />1/10<br />
    27. 27. INFORMAL SECTOR<br /><ul><li>Main source of income
    28. 28. Informal sector share of employment grew to about 20percent in 1986 and to an estimated 40 percent in 2004.
    29. 29. Operation Murambatsvina</li></li></ul><li>
    30. 30.
    31. 31.
    32. 32.
    33. 33.
    34. 34.
    35. 35.
    36. 36.
    37. 37.
    38. 38. Out of control<br />Loss of value<br />
    39. 39. Characteristics <br />
    40. 40. Non monetary asset<br />Foreign currency<br />
    41. 41. Credit purchases<br />Fall in purchasing power<br />
    42. 42. Price index<br />
    43. 43.
    44. 44. How it happened<br />
    45. 45. Confiscation of white-owned farmland<br />Killing of other white farmers<br />
    46. 46. Repudiation of debts to the International Monetary Fund<br />
    47. 47. Why these factors caused hyperinflation<br />
    48. 48. What else the government did?<br />Declared inflation illegal<br />Freezing of wages<br />
    49. 49.
    50. 50.
    51. 51. what is the best strategy forward to tackle this hyperinflation ?<br />
    52. 52. Linking of currency<br />Froze government spending<br />Stop printing currency<br />lifting all price controls<br />Deregulate their economy<br />
    53. 53. ROLE OF RBZ<br />HYPER-INFLATION<br />DEMAND FOR CASH<br />PRINTING MONEY<br />
    54. 54. DOLLARIZATION<br />CURRENCYBOARD<br />FREE BANKING SYSTEM<br />
    55. 55. DOLLARIZATION<br /><ul><li>UNOFFICIAL
    56. 56. SEMI OFFICIAL
    57. 57. OFFICIAL</li></li></ul><li>Characteristics of Dollarization<br />Imports Monetary Policy<br />Arbitrage keeps price low<br />Inflation etc. are low<br />Exp: Ecuador, El Salvador etc<br />
    58. 58. OPTIONSAVAILABLE<br />FULLY CONVERTIBLE<br />HIGH CREDIBILITY<br />LOW AND STABLE INFLATION etc<br />
    59. 59. Fully Convertible<br />High Credibility<br />Low and Stable Inflation etc<br />More Business with Europe<br />
    60. 60. Largest Trading Partner<br />Large base of Expatriates<br />Exchange Controls<br />Unified Currency Zone<br />
    61. 61. CURRENCY BOARD<br />Currency Board<br />No role in monetary base<br />No Government Control<br />No Control on money Supply<br /> Market Forces determine Money Supply<br />
    62. 62. Fully backed by Foreign Reserve<br />Fully convertible at fixed rate<br />Acquire reserves for elasticity<br />Exp: Argentina (1991-2002)<br />Estonia (1992)<br />Lithonia (1994)<br />
    63. 63. FREE BANKING SYSTEM<br />.<br />FREE BANKING SYSTEM<br />No Central Bank<br />No Lender of Last Resort<br />No Reserve requirements<br />No restrictions on Banks Portfolio’s rate<br />
    64. 64. THANK YOU!!<br />Faraz Khan<br />RoshanSonthalia<br />Smriti Gupta<br />Stuti Gupta<br />FORE School of Management<br />

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