Hyperinflation in Zimbabwe

Presented by Hasan Ali

Agenda

What is Hyperinflation ? What exactly happened in Zimbabwe What's the way out

What is Hyperinflation ?

In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, causing the population to minimize their holdings of money.

Meanwhile, the real value of economic items generally stay the same with respect to one another, and remain relatively stable in terms of foreign currencies.

How is it different from inflation ?

Unlike regular inflation, where the process of rising prices is protracted and not generally noticeable except by studying past market prices, hyperinflation sees a rapid and continuing increase prices and in the supply of money, and the cost of goods.

Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation.

Models of Hyperinflation

Confidence Model - In this model, some event, or series of events, such as defeats in battle removes the belief that the authority (a bank or a government) issuing the money will remain solvent. Because people do not want to hold notes which may become valueless, they want to spend them. 

Monetary Model - In this model, hyperinflation is a positive feedback cycle of rapid monetary expansion. When businesspeople perceive that the issuer is committed to a policy of rapid currency expansion, they mark up prices to cover the expected decay in the currency's value.

Calculation of Hyperinflation

Facts & Figures

Highest inflation rate – November 2008 - 7.96 × 1010 %

Equivalent daily inflation rate - 98.01%

Time required for prices to double - 24.7 hours

Hyperinflation in Zimbabwe

30 years ago – ZWD = 1.25 USD Gradually, rampant inflation and collapse of the economy

devalued the currency. Hyperinflation took shape in early 21st century

2004 - 624% 2006 - 1,730% June 2007- 11,000% July 2008 – 2,200,000% The First Zimbabwe Dollar (ZWD) is obsolete. In June 2006, it

was replaced by the Second Zimbabwe Dollar (ZWN) at a rate of 1000 to 1. A third and fourth dollar were later introduced and then the currency was abandoned.

Zimbabwe no longer has its own currency and Zimbabwe dollars of all types are worthless.

1 ZWD = 0.00276 USD (today !)

Causes of Hyperinflation in Zimbabwe

Land reform program – focused on taking land from white farmers and redistributing those properties and assets to black farmers.

Food production and revenues from export of food plummeted

Monetary phenomena (the result of Mugabe's government printing money)

Effects of Hyperinflation in Zimbabwe

No functioning Central Bank and no local currency

Stores don’t have food on shelves People are hungry No water, no electricity Prices rise daily “Imagine, you cannot even carry the exact bus fare

on your way to work because the chances are high that you will be told fares have gone up; you can't even make budgets for household commodities, as used to be the case seven or so years ago." 

Adaptation

Use of foreign currencies

The black market

Redenomination

Solution

The most direct solution is a credible promise to stop printing unlimited amounts of money.

The government could declare some foreign currency to be the nation's official currency.

Formation of the inclusive Government and the liberalization of the economy.