Background about ZimbabweFactIn Numbers(1st January 2012)Putting things intoperspectivePopulation 13 MillionAbout twice the size ofDhaka.GDP 6.21 Billion46 times smaller than theGDP of BangladeshGDP per Capita $500Almost one third of whateach Bangladeshi earnsUnemployment 95% Highest in the worldCurrent President Robert MugabeHead the firstgovernment as primeminister on 4 March1980
What is Inflation?By inflation we mean a general rise in pricesthroughout the economy. Government policy isused to keep inflation both low and stable.(J.Sloman,2001, 2nd edition, Pearson Education Limited. Essentials of Economics, pp.244-245)
What is Hyperinflation?In economics, hyperinflation occurs when a countryexperiences very high, accelerating, and perceptibly"unstoppable" rates of inflation. Two things happen asa consequence:1. General price level of goods andservices increase, meaning currencyloses real value.2. The real values of economic itemsgenerally stay the same.
What causes Hyperinflation?Hyperinflation is often associated with wars, theiraftermath, sociopolitical upheavals, or other crises thatmake it difficult for the government to tax thepopulation.So, the government starts printing more money tofinance its expenditures and thus pumps moneyinto the economy.
And as a result of HyperinflationPeople can obtain less products for moremoneyCurrency devaluatesPrices of goods go upPeople have more money to spend
Hyperinflation in Zimbabwe0%10000%20000%30000%40000%50000%60000%70000%Inflation RateInflation Rate
Due to Hyperinflation in ZimbabweA toilet paper would cost you $417You have to spare a measly $50 Billion to buy an eggThey even have a 100 trillion dollar note!And with ONLY two truck loads of money you couldpay your restaurant bill!
What pushed Zimbabwe into suchmadness?The three main causes of hyperinflation in Zimbabwe areas follows:1. Controversial Government land reforms2. Drought3. HIV/AIDS
Land ReformsThe prime contributor to HyperinflationThe farm sector supplied about 60 percent of theinputs to the manufacturing base—so agriculture was trulythe backbone of the economy.Due to colonialism4500 White Families owned most of thecommercial farmsExcellent productive capacityWell-irrigated
Land ReformsThe prime contributor to HyperinflationThe farm sector supplied about 60 percent of theinputs to the manufacturing base—so agriculture was trulythe backbone of the economy.Due to colonialism840,000 black farmers eked out a living on thecommunal landsCompletely barrenNo water supply
Land ReformsThe prime contributor to HyperinflationCommercial Farms Communal firmsHad secure property titlesthat gave farmers largeincentives to efficientlymanage the landwithout property titlesallowed a banking sector toloan funds for machinery,irrigation etc.Banks were reluctant toprovide loans
Land ReformsThe prime contributor to HyperinflationThen president Mugabe decided on Land ReformsThis essentially caused,1. Seizure of commercial farms from4500 white families2. Redistribution of these farmsamongst black farmers
Land ReformsThe prime contributor to HyperinflationThen president Mugabe decided on Land ReformsIn practice, however,Most plots ended upin the hands of Mugabe’s politicalsupporters and governmentofficials, whose knowledge offarming was meager.
Land ReformsDuring the next 4 YearsINFLATION SOAREDGovernment started printing money to be able to afford goods in spite ofincreasing pricesPrice of goods went upEconomy began to shrinkDue to lack of expertise the black people were clueless as to what to dowith the commercial firms
Land ReformsAfter Which..The demise of the agricultural sector led to widespread famineWithout equity in the banking system, vast networks of economic activitycollapsed across all sectors of the economyBecause the government no longer enforced titles to land, there was farless collateral for bank loans. Dozens of banks collapsed; those that didnot collapse refused to extend credit to farmersFinancial investors fled, wondering if other businesses might be seizednext. FDI fell to 0
Possible SolutionsDollarizationFreezinggovernmentspendingStop printingcurrencyIncrease Taxes
DollarizationOccurs when the inhabitants of a country useforeign currencyin parallel to or instead ofthe domestic currencyas a store of value, unitof account, and/or medium of exchange within thedomestic economy.This is effectivebecause the real value ofnon-monetary items does notdecrease, what decreases is the value of the currencywith which those commodities are bought.
Freezing Government SpendingInflation would decreaseThere is no need for central bank to print any moremoneyIf government decreases its spendingThe central bank printed money to facilitategovernment spending
Stop Printing CurrencyEventually, Inflation would decreasePrice of goods and services go downLess money circulates the economyPrinting less money would ensure
ConclusionWhen all these policies are in place, hopefully, theinflation will die down and Zimbabwean economy wouldsee better days