Tuesday, 24 March 2015

Zimbabwe: Hyperinflation & One Hundred Trillion Note

From the term itself we can see that its an inflation which is too difficult to control or it is an inflation which is occurring at very high rate. It is characterized by the general increase of price levels of goods and services at very high rate, say 50% a month. Money becomes almost worthless and it may result in currency collapse and severe economic and social problems.

Normal causes of hyperinflation
  • Excessive or rapid increase in  money supply
  • Supply shocks often caused by natural calamities and wars.
  • Rapid depreciation of currency due to other economic factors

Zimbabwe is a landlocked country in southern Africa. The country gained independence form Britain on 18th April 1980. After independence the currency changed to Zimbabwe dollar from Rhodesian dollar at the par value. During the initial years the country experienced a steady upward growth which continued till mid 1990s.

 Main causes that led to the hyperinflation in Zimbabwe( 1997-2008).


Although a lot of factors are responsible for the cause of hyperinflation, the three most important ones are : 


Land reform program: Throughout the colonial history of Zimbabwe, and through the 80's and 90's, Zimbabwe has experienced large scale agricultural exports and relative economic success, once second only behind South Africa. During this period, most of the country's most productive farmland remained in white hands after independence, and through the 1990s  the government of President Robert Mugabe worked to shift ownership. Thus the agricultural industry collapsed beyond recovery. Once a net exporter of food had turned into net importer and this caused a serious impact on the economy.The country that had once provided much of the grain to the world has barely any food to put on the shelves in the supermarket. The banking sector also collapsed, with farmers unable to obtain loans for capital development. The country was not able to repay a big chunk of its loans and its debt accumulated day by day and due to this reason most of the external and internal borrowing came to a halt as no one was ready to lend them. At the peak of the crisis the government mostly depended upon the aid from other nations and international agencies.

War funding: In late 1990s Mugabe authorized Zimbabwean troops to fight in the Second Congo War.In September 1998, even as economic conditions continued to worsen, the President sent 11,000 troops to the Democratic Republic of the Congo (DRC) to back the discredited leader, Laurent Kabila. Its involvement in the war drained much of its monetary reserves on the wake of 21st century. In fact the Mugabe government was printing more money to help financing the war. Zimbabwe was under-reporting its war spending to the International Monetary Fund by perhaps $22 million a month.

Economic Mismanagement: One of the major drivers of inflation has been fiscal mismanagement over the past 10 years. According to IMF reports, the budget deficit, including grants, stood at 10.0 percent of estimated GDP in 2006. This figure is over triple the figure of 3.0 percent of GDP achieved in 1998. The overall result of all this severely mismanaged causes was a food crisis, and a battering for the economy as foreign exchange earnings slumped - both from farming and from tourism, amid violence surrounding the land reform program.

Effects
Persistent very high inflation. The currency(Zimbabwe dollar) was heavily depreciated and this cause severe economic problems.  In 2008, the annual inflation rate was 11.2 million percentage points, practically costing more to print the money than the money is worth. For eg: at one point of time a loaf of bread, costed between Z$7,000 and Z$10,000..The effect of currency under valuation is such that they had to print money with denominations in trillions.

Severe Unemployment: Over 80% of the population were unemployed. Life expectancy of people dropped and and it has one of the lowest life expectancy in the world and a large proportion of the people were depending upon food aid.

Severe food crisis: Millions of Zimbabweans had experienced a huge scarcity of food and most of them were surviving on just one meal a day and this is worsened by the droughts of mid 2000s.

Wide spread of diseases and mortality rate: HIV/Aids and malaria cases were common adding further problems to the economy.

Population Displacement: Hundreds of thousands of people were uprooted at the height of the crisis, either fleeing to neighboring countries or displaced within Zimbabwe.

Despite attempts to control inflation by legislation, and three redenominations (in 2006, 2008 and 2009), use of the Zimbabwean dollar as an official currency was effectively abandoned on 12 April 2009.

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