Hyperinflation in ZimbabweIts causes, current situation and possible solutions

Presented By

Name Batch Number Roll Number

Slides

Md. Golam Moula Mehedi Hasan   45E ZR – 14 1 - 7

Kazi Md. Masum 45E ZR – 04 8 - 15

Muhammad Maqsud Hussain 45E ZR – 13 16 - 22

Fardin Humayun 45E ZR – 25 23 - 31

Dipankar Ghosh 45E ZR – 36 36 - 38

Hasnat Imtiaz Uddin Ahmed 45E ZR – 56 33 - 35

Contents

1. About Zimbabwe2. What is Inflation?3. How is it Measured?4. What is Hyperinflation?5. Current situation in Zimbabwe6. What caused this Hyperinflation7. What can be done to overcome it

About Zimbabwe

Background about Zimbabwe

FactIn Numbers

(1st January 2012)Putting things into

perspective

Population 13 MillionAbout twice the size of

Dhaka.

GDP 6.21 Billion46 times smaller than the

GDP of Bangladesh

GDP per Capita $500Almost one third of what each Bangladeshi earns

Unemployment 95% Highest in the world

Current President Robert Mugabe

Head the first government as prime minister on 4 March

1980

What is Inflation?

What is Inflation?

By inflation we mean a general rise in prices throughout the economy. Government policy is

used to keep inflation both low and stable.

(J.Sloman,2001, 2nd edition, Pearson Education Limited. 'Essentials of Economics', pp.244-245)

How is inflation measured?

Inflation: How Is It Measured?

A number of goods that are representative of the economy are put together into what is referred to as a "market basket."

Inflation: How Is It Measured?A year is selected as the base year

1982

Inflation: How Is It Measured?A market basket is made and the price of goods is

noted down

1982

$3.25 $3.00 $0.75

Total Price = $(3.25+3.00+0.75)

= $7

Inflation: How Is It Measured?The base Consumer Price Index (CPI) is calculated

1982

$3.25 $3.00 $0.75

Base CPI =$7/$7

= 1 = CPI1

Inflation: How Is It Measured?Repeating the same process for the year 2013

1982

$3.25 $3.00 $0.75

2013

$8.25 $5.00 $2.75

Total Price =

= 16

$(8.25+5.00+2.75)Base CPI =$7/$7

= 1 = CPI1

Inflation: How Is It Measured?Calculating CPI for the year 2013

1982

$3.25 $3.00 $0.75

2013

$8.25 $5.00 $2.75

Base CPI =$7/$7

= 1 = CPI1

CPI2 = $16/$7

= 2.29

Inflation: How Is It Measured?Increase in inflation rate for the year 2013

relative to 1982

=Increase in Inflation =

(CPI2 - CPI1) * 100 (2.29 - 1.00) * 100

= 129%

What is Hyperinflation?

What is Hyperinflation?

In economics, hyperinflation occurs when a country

experiences very high, accelerating, and perceptibly

"unstoppable" rates of inflation. Two things happen as a consequence:

1. General price level of goods and services increase, meaning currency loses real value.

2. The real values of economic items generally stay the same.

What causes Hyperinflation?Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that

make it difficult for the government to tax the population.

So, the government starts printing more money to

finance its expenditures and thus pumps money into the economy.

And as a result of Hyperinflation

People can obtain less products for more money

Currency devaluates

Prices of goods go up

People have more money to spend

Current situation in Zimbabwe

Hyperinflation in Zimbabwe

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

0%

10000%

20000%

30000%

40000%

50000%

60000%

70000%

Inflation Rate

Inflation Rate

Due to Hyperinflation in Zimbabwe

A toilet paper would cost you $417

You have to spare a measly $50 Billion to buy an egg

They even have a 100 trillion dollar note!

And with ONLY two truck loads of money you could pay your restaurant bill!

What caused this Hyperinflation?

What pushed Zimbabwe into such madness?

The three main causes of hyperinflation in Zimbabwe are as follows:

1. Controversial Government land reforms2. Drought3. HIV/AIDS

Land Reforms The prime contributor to Hyperinflation

The farm sector supplied about 60 percent of the inputs to the manufacturing base—so agriculture was truly the backbone of the economy.

Due to colonialism

4500 White Families owned most of the commercial farms

Excellent productive capacityWell-irrigated

Land Reforms The prime contributor to Hyperinflation

The farm sector supplied about 60 percent of the inputs to the manufacturing base—so agriculture was truly the backbone of the economy.

Due to colonialism

840,000 black farmers eked out a living on the communal lands

Completely barren No water supply

Land Reforms The prime contributor to Hyperinflation

Commercial Farms Communal firms

Had secure property titles that gave farmers large incentives to efficiently

manage the land

without property titles

allowed a banking sector to loan funds for machinery,

irrigation etc.

Banks were reluctant to provide loans

Land Reforms The prime contributor to Hyperinflation

Then president Mugabe decided on Land ReformsThis essentially caused,

1. Seizure of commercial farms from 4500 white families

2. Redistribution of these farms amongst black farmers

Land Reforms The prime contributor to Hyperinflation

Then president Mugabe decided on Land ReformsIn practice, however,

Most plots ended upin the hands of Mugabe’s political

supporters and government officials, whose knowledge of farming was

meager.

Land Reforms During the next 4 Years

INFLATION SOARED

Government started printing money to be able to afford goods in spite of increasing prices

Price of goods went up

Economy began to shrink

Due to lack of expertise the black people were clueless as to what to do with the commercial firms

Land Reforms After Which..

The demise of the agricultural sector led to widespread famine

Without equity in the banking system, vast networks of economic activity collapsed across all sectors of the economy

Because the government no longer enforced titles to land, there was far less collateral for bank loans. Dozens of banks collapsed; those that did

not collapse refused to extend credit to farmers

Financial investors fled, wondering if other businesses might be seized next. FDI fell to 0

Things that can be done

Possible Solutions

DollarizationFreezing

government spending

Stop printing currency Increase Taxes

Dollarization

Occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency as a store of value, unit of account, and/or medium of exchange within the domestic economy.

This is effective because the real value of non-monetary items does not decrease, what decreases is the value of the currency with which those commodities are bought.

Freezing Government Spending

Inflation would decrease

There is no need for central bank to print any more money

If government decreases its spending

The central bank printed money to facilitate government spending

Stop Printing Currency

Eventually, Inflation would decrease

Price of goods and services go down

Less money circulates the economy

Printing less money would ensure

Conclusion

When all these policies are in place, hopefully, the inflation will die down and Zimbabwean economy would

see better days

THANK YOU