HYPER INFLATION

IN
ZIMBABWE
 INTRODUCTION

Hyperinflation in Zimbabwe was a period of currency instability that began

in the late 1990s shortly after the confiscation of private farms from
landowners, towards the end of Zimbabwean involvement in the Second
congo war During the height of inflation from 2008 to 2009, it was difficult
to measure Zimbabwe's hyperinflation because the government of
Zimbabwe stopped filing official inflation statistics. However, Zimbabwe's
peak month of inflation is estimated at 79.6 billion percent in mid-
November 2008.

In 2009, Zimbabwe stopped printing its currency, with currencies from

other countries being used. In mid-2015, Zimbabwe announced plans to
have completely switched to the United States dollar by the end of
2015.And Congo War.
 HISTORICAL CONTEXT
On 18 April 1980, the Republic of Zimbabwe was born from the former British colony of Southern Rhodesia.
The Rhodesian Dollar was replaced by the Zimbabwe dollar at par value. When Zimbabwe gained
independence, the Zimbabwean dollar was more valuable than the US dollar at the official exchange rates,
however, this value did not reflect reality, and its black market value was lower. In its early years, Zimbabwe
experienced strong growth and development. Wheat production for non-drought years was proportionally
higher than in the past. The tobacco industry was thriving as well. Economic indicators for the country were
strong.

From 1991 to 1996, the Zimbabwean Zanu-PF government of president Robert Mugabe embarked on an
Economic Structural Adjustment Programme (ESAP), designed by the IMF and the World Bank, that had
serious negative effects on Zimbabwe's economy. In the late 1990s, the government instituted land reforms
intended to evict white landowners and place their holdings in the hands of black farmers. However, many of
these "farmers" had no experience or training in farming.[citation needed] From 1999 to 2009, the country
experienced a sharp drop in food production and in all other sectors. The banking sector also collapsed, with
farmers unable to obtain loans for capital development. Food output capacity fell 45%, manufacturing output
29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%. Life expectancy dropped.
The Reserve Bank of Zimbabwe blamed the hyperinflation on economic sanctions imposed by the United
States of America, the IMF and the European Union. These sanctions affect the government of Zimbabwe,
and asset freezes and visa denials targeted at 200 specific Zimbabweans closely tied to the Mugabe regime.
There are also restrictions placed on trade with Zimbabwe, by both individual businesses and the US
Treasury Department's Office of Foreign Asset Control.
 CAUSES
A monetarist view is that a general increase in the prices of things is less a commentary on the
worth of those things than on the worth of the money. This has objective and subjective
components:

Objectively, that the money has no firm basis to give it a value.

Subjectively, that the people holding the money lack confidence in its ability to retain its value.
Crucial to both components is discipline over the creation of additional money. However, the
Mugabe government was printing money to finance involvement in the Democratic Republic of
the Congo and, in 2000, in the Second Congo War, including higher salaries for army and
government officials. Zimbabwe was under-reporting its war spending to the International
Monetary Fund by perhaps $23 million a month. Another motive for excessive money creation has
been self-dealing. Transparency International ranks Zimbabwe's government 157th of 177 in
terms of institutionalised corruption. The resulting lack of confidence in government undermines
confidence in the future and faith in the currency.

Economic mis-steps by government can create shortages and occupy people with workarounds
rather than productivity. Though this harms the economy, it does not necessarily undermine the
value of the currency, but may harm confidence in the future. Widespread poverty and violence,
including government violence to stifle political opposition, also undermines confidence in the
 SELF PERPETUATION

Lack of confidence in government to practie fiscal restraint feeds on

itself. In Zimbabwe, neither the issuance of banknotes of higher
denominations nor proclamation of new currency regimes led holders of
the currency to expect that the new money would be more stable than
the old. Remedies announced by the government never included a
believable basis for monetary stability. Thus, one reason the currency
continued to lose value, causing hyperinflation, is that so many people
expected it to.
 OLD MUTUAL IMPLIED RATE

As hyperinflation accelerated, the value of the Zimbabwe dollar declined fast against other
currencies, yet official exchange rates published by the Reserve Bank of Zimbabwe were
infrequently updated; this made it impossible to tell from an official source how much the
Zimbabwe dollar was really worth against other currencies on a particular day, which in turn
disrupted international business transactions involving Zimbabwe dollars. Staff from WM/Reuters
devised an indirect means of measurement that was termed the Old Mutual Implied Rate (OMIR).
This took the daily price of shares in the insurance company Old Mutual that traded in the London
and Harare stockmarkets and derived from it a notional daily exchange rate between the
Zimbabwe dollar and the pound. Shares had much less strict capital controls than through the
Zimbabwe banking system, so the shares were used as a vehicle for moving capital between
currencies by buying stock in either London or Harare and then selling in the other location.

The Old Mutual Implied rate was widely adopted benchmark rate for unofficial currency exchange
until intervention by the Reserve Bank of Zimbabwe in May 2008 to prohibit the transfer of
shares in Old Mutual, ABC and Kingdom Meikles Africa out of the country, therefore stopping their
fungibility.
 ADAPTATAIONS

Use of foreign currencies

In 2007, the government declared inflation illegal. Anyone who raised the prices for goods and services was
subject to arrest. This amounted to a price freeze, which is usually ineffective in halting inflation. Officials
arrested numerous corporate executives for changing their prices.

In December 2008, the Central Bank of Zimbabwe licensed around 1,000 shops to deal in foreign currency.
Citizens had increasingly been using foreign currency in daily exchanges, as local shops stated fewer prices in
Zimbabwe dollars because they needed foreign currency to import foreign goods. Many businesses and street
vendors continued to do so without getting the license.

In January 2009, acting Finance Minister Patrick Chinamasa lifted the restriction to use only Zimbabwean
dollars[citation needed]. This too acknowledged what many were already doing. Citizens were allowed to use
the US dollar, the euro, and the South African rand. However, teachers and civil servants were still being paid
in Zimbabwean dollars. Even though their salaries were in the trillions per month, this amounted to around
US$1, or half the daily bus fare. The government also used a restriction on bank withdrawals to try to limit the
amount of money that was in circulation. It limited cash withdrawals to $Z500,000 which was around US$0.25.
 THE BLACK MARKET

Official, black market, and OMIR exchange rates 1 Jan 2001 to 2 Feb 2009. Note the logarithmic scale.
Prices in shops and restaurants were still quoted in Zimbabwean dollars, but were adjusted several times a
day. Any Zimbabwean dollars acquired needed to be exchanged for foreign currency on the parallel market
immediately, or the holder would suffer a significant loss of value. For example, a mini-bus driver charged
riders in Zimbabwean dollars, but different rates throughout the day: The evening commute was highest-
priced. He sometimes exchanged money three times a day, not in banks but in back office rooms and
parking lots.

Such business venues constituted a black market, an arena explicitly outside the law. Transactors could
evade the price freezes and the mandate to use Zimbabwean dollars.

The black market served the demand for daily goods such as soap and bread, as grocery stores operating
within the law no longer sold items whose prices were strictly controlled, or charged customers more if they
were paying in Zimbabwean dollars. At one point, a loaf of bread was Z$550 million in the regular market,
when bread was even available; apart from a trip to another country, the black market was the only option
for almost all goods, and bread might cost Z$10 billion.
 SOLUTIONS
A solution effectively adopted by Zimbabwe is to adopt some foreign currency as official. To
facilitate commerce, it is less important which currency is adopted than that the government
standardise on a single currency. The US dollar, the euro, and the South African rand were
candidates; the US dollar had the most credibility and was the most widely traded within
Zimbabwe.[42] Zimbabwe could have joined the nearby nations of Lesotho, Namibia, South
Africa, and Swaziland, which constitute the Common Monetary Area, or "Rand Zone"[4] by
formally deciding to use the rand to promote trade and stability.[43]

In 2009, the government abandoned printing Zimbabwean dollars at all.[42] This implicitly solved
the chronic problem of lack of confidence in the Zimbabwean dollar, and compelled people to use
the foreign currency of their choice. Since then Zimbabwe has used a combination of foreign
currencies, mostly US dollars.

In 2014, the Reserve Bank of Zimbabwe unveiled "convertible" coins in denominations of US$0.01
through US$0.50. The Bank said that 80% of Zimbabweans use the U.S. dollar, and said the local
lack of coins induces retailers to round prices up to the next higher dollar. The coins extend the
use of the dollar as a de facto currency, and indeed the National Bank has repeatedly assured
that it does not intend to bring back a national currency.[44] As of May 2016 the liquidity of the
USD had rapidly decreased and John Mangudya, the governor of the Reserve Bank of Zimbabwe,
 DEMONETIZATION

In June 2015, the Reserve Bank of Zimbabwe said it would begin a

process to "demonetise" (i.e., to officially value a flat currency at zero).
The plan was to have completed the switch to the US dollar by the end
of September 2015. In December 2015 Patrick Chinamasa the
Zimbabwe Minister of Finance said they would make the Chinese yuan
their main reserve currency and legal tender after China cancelled $40
million debts. However this was denied by the Reserve Bank of
Zimbabwe in January 2016. In June 2016, nine currencies were legal
tender in Zimbabwe but it was estimated 90% of transactions were in
US dollars and 5% in Rand.
 THANK YOU:

BY-
PANSHAYANA K.N
SAI SUNDER
SHARATH KUMAR
SACHIN GOWDA
GANGDHAR .V