Zimbabwe Downfall

7/28/2019 Zimbabwe Downfall

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DOWNFALL OF ZIMBABWE

ECONOMY

F.Y B.com (Accounting & Finance)

COMMERCE PROJECT BY - KEDAR BHOIR (07)

VIKAS KHADE (23)

MEET GALA (56)


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ACKNOWLEDGEMENT

We would like to express our greatest gratitude to the people who havehelped and supported us throughout the project. We are grateful to our Prof.

Oberoi for his continuous support for the project, from initial advice and

contacts in early stages of conceptual inception and through ongoing advice

and encouragement to this day.

A special thank of us goes to our other teachers who helped us in completing

the project and they exchanged their ideas, thoughts and made this project

easy and accurate.

At last but not the least we want to thank our friends who appreciated us for

our work and motivated us and finally to God who made all the things possible.

Kedar Bhoir

Vikas Khade

Meet Gala


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Contents

1. Introduction of Zimbabwe .04

2. Inflation and Hyperinflation...06

2.1 Common Factors which have caused Hyperinflation in the past.06

2.2 Difference between Inflation and Hyperinflation.....06

3. Road to Hyperinflation and Dollarization08

4. Effects of Hyperinflation.14

4.1 Before and During Hyperinflation..15

4.2 Zimbabwes Inflation Nightmare.16

4.3 Starving Billionaires..17

4.4 Hyperinflation Consequences18

4.5 Impact on Economy.19

4.6 Loan Sanctions by IMF ..20

4.7 Impact of Revaluation.20

5. Timeline of Zimbabwes Downfall21

6.Challenges and Policy Options after Hyperinflation31

7. Current situation..34

8. Reference..37


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1. Introduction of Zimbabwe

In 1980, the new nation of Zimbabwe rose as Rhodesia gained independence

from the British Empire. Rhodesia had long been considered the jewel of Africa

as it was rich in fertile farmlands and raw material such as gold and chromium.

The rule of law was secure as much of the population trusted the police and

believed in equitable treatment in the courts. With low crime, strong banking,

a sophisticated manufacturing base, and booming tourism; real GDP growth

averaged a strong 4.3%.

Prior to independence, Rhodesia had been administrated by Great Britain

during the late 19

th

centurys Race for Africa as part of the British South AfricaCompany. The Colony of Southern Rhodesia was created in 1923, granting self-

rule to the white colonists, while leaving blacks disenfranchised.

Rhodesia enacted the Land Apportionment Act in the year 1930, forbidding

land ownership for blacks outside of tribal reserve areas. During that time, the

British built an agricultural empire in the colony, developing one of the most

sophisticated water delivery systems in Southern Africa. With only 7% of the

land, Rhodesia had 86% of the areas dams and 93% of the reservoir surface

area at the time of independence, serving an agricultural sector that was thebackbone of a thriving economy: strong enough to feed all of its seven million

people and export the rest to the world.

Around 70% of the Rhodesias vast farmland had been run by about 4,500

white farmers who produced cash crops such as tobacco and cotton. These

white-owned farms supported:

a flourishing banking sector loaning funds for machinery, seeds, tools most importantly, the water delivery system.

The farms employed some 350,000 black workers and provided money for

local schools and clinics. With the Zimbabwean dollar replacing the Rhodesian

dollar at par and trading for US$1.59, the economic future looked bright for

the fledgling democracy of Zimbabwe.


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That is, until Robert Mugabe came to power.

In 1960s, Mugabe became prominent and became the Secretary General of the

Zimbabwe African National Union, a militant organization that fought the

British in the Rhodesian Bush War throughout the 1970s. In a nation wherethere was only 1 white for every 22 blacks Zimbabwe, hadnt seen blacks in a

position of power until 1979 , and then only in lower ministerial positions. The

ZANU (Zimbabwe African National Union) fought this inequitable bi-racial rule

side by side with the Zimbabwe African Peoples Union, comrades in arms

united only by their desire to expel the British from their country. Once that

end had been achieved, the two groups had divergent philosophies about the

governance of the country: Mugabes group had Maoist beliefs, while the

ZAPU (Zimbabwe African peoples Union) was Marxist.

When the war concluded in 1979, Mugabe was hailed as a national hero, and

won election to the post of Prime Minister in the first election following

independence. Since then, the two opposing groups have been embroiled in a

bitter civil war for control of the nation, with Mugabes ZANU retaining control

through force, intimidation, and outright murder. Elections are held from time

to time; the results are usually rigged by the ruling ZANUs. In 1987, the

position of Prime Minister was abolished, with Mugabe seizing new powers

relegated to the position of Executive President ofZimbabwe and effectivelybecoming Dictator.

While Rhodesias white-owned farms thrived, as a result of the Land

Apportionment Act some 840,000 black farmers were crowded into eroded

and over-farmed land unconnected to the irrigation grid, producing corn,

groundnuts, and other staples. This land was without title, and squabbling over

land rights between villagers was rampant. As part of the Lancaster House

Agreement , the nations independence agreement with Britain , the subject of

land redistribution was blocked until 1990. Mugabe sought to institute landreform, with the goal of redistributing the white-owned farms to black

farmers. The nations constitution forbade the seizure of land without proper

compensation, and the electorate rejected a 1999 referendum to amend the

constitution to allow it.


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2. Inflation and Hyperinflation

Inflation is defined as a continuing and rapid rise in the price level. Accordingto Milton Friedman, it is always and everywhere a monetary phenomenon.

Most economists whether monetarists or Keynesians, agree that proposition.

Hyperinflation is a situation where the price increases are so out of control

that the concept of inflation is meaningless. A working definition is that a

country is in hyperinflation when its annual inflation rate reaches 1000% p.a.

2.1 Common Factors which have caused Hyperinflation in

the past Hyperinflation often occurs when there is a large increase in the money

supply not supported by gross domestic product (GDP) growth, resulting

in an imbalance in the supply and demand for the money. Left

unchecked this causes prices to increase, as the currency loses its value.

Hyperinflation often occurs when there is a loss of confidence in acurrency's ability to maintain its value in the aftermath. Because of this,

sellers demand a risk premium to accept the currency, and they do this

by raising their prices.

One of the most famous examples of hyperinflation occurred in Germany

between January 1922 and November 1923. By some estimates, the average

price level increased by a factor of 20 billion, doubling every 28 hours.

2.2 Difference between Inflation and Hyperinflation

Inflation refers to any sustained increase in the cost of living expenditures. It

is usually thought in the terms of Consumer Price Index (or CPI). And,

hyperinflation refers to an out of control increase of prices, resulting indiminishing value of a countrys currency. This occurs when there is an

increase in the money supply in the domestic market which fails to satisfy the

very reasons it seeks to combat.

Another difference is that while inflation works towards securing the economic

stability of a country, hyperinflation seeks to demobilize the same economy


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further into the web of debts. In Zimbabwe, the economy was in such a

condition that the prices of even the basic items are not less than few million

dollars. For example, the price of three eggs was 100 billion dollars and the

price of a dozen tomatoes varied between 3-5 million dollars. This shows that

during hyperinflation, there are irrational increases in prices which not at allhelp in any sense, thereby, failing the government to achieve its targets. In

other words, hyperinflation is generally associated with paper money as it can

easily used to increase the money supply. It effectively destroys the

purchasing power of the private and public savings, distorts the economy in

favor of extreme consumption, and hoarding of real assets, causing the

monetary base (hard currency), to escape the country, while making the

afflicted area anathema to investment.

Hyperinflation can be triggered as a result of the following conditions:

The general population prefers to keep its wealth in non-monetaryassets or in a relatively stable foreign currency. Amounts of local

currency held are immediately invested to maintain the purchasing

power.

The general population regards monetary amounts not in terms of thelocal currency but in terms of a relatively stable foreign currency. Prices

may be quoted in that foreign currency.

Sales and purchases on credit take place at prices that compensate forthe expected loss of purchasing power during the credit period, even if

the period is short.

Interest rates, wages and prices are linked to a price index and thecumulative inflation rate over three years approaches, or exceeds, 100%.


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3. Road to Hyperinflation and Dollarization

1997 to 1999: Political vulnerability and economicbreakdown

In August 1997, approximately 60,000 war veterans were granted ZWD 50,000

each (approximately USD 3,000 at the time) plus a monthly pension of

approximately USD 125 per month outside the budget. The payouts amounted

to almost three percent of GDP at the time and this had the immediate effect of

inflating the budget deficit at the end of 1997 by 5 percent from 5 the 1996levels. Concerns were raised pertaining to the financing side of the transaction

in view of an already precarious fiscal position, and on that basis in September

1997, the World Bank temporarily withdrew a USD62.5 million standing credit

line for the balance of payments support until the government had

demonstrated that the payments would not result in a higher than the

projected 8.9 percent budget deficit in the 18 months leading to

December1998. As an ad hoc decision, the government had intended to

accommodate the gratuities payment through tax increases in the 1998 budget

but countrywide protests orchestrated by the trade unions forced thegovernment to backpedal and resolve to monetization of the transaction.

The second populist decision followed in November 1997 when the president,

Mugabe, announced plans to compulsorily acquire white-owned commercial

farms, again without elaboration on the financing side of the transaction. This

had the immediate effect of giving investors a perception of an ensuing

precarious fiscal position and consequently there were spontaneous and

concerted runs against the currency from the money and capital markets. The

climax of these events was on 14 November 1997 when the Zimbabwean dollar

crashed and lst 75 percent of its value against theory USD on a single day, on

what is now known as Black Friday in Zimbabwean economic history. The stock

market also plummeted and the index was down by 46 percent by day end from

the peak August levels. The central bank had to intervene and raise interest

rates by six percentage points within that single month. The exchange rate


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continued to depreciate uncontrollably, thus the 1997 financial and currency

turbulence set the stage for a long and potentially long slump in the real

economy.

In September 1998 the president agreed to send 11,000 troops under the SADCprotocol, to the Democratic Republic of Congo (DRC) to back the discredited

leader, Kabila, who was under attack by Rwandan and Ugandan backed rebels.

This act was simply the utilization of national military by the political elite for

private financial gain as it emerged that the Zanu PF bigwigs had been

promised mineral concession in the DRC. A letter written by the finance ministry

to the IMF seeking funds puts the funds to finance the war at USD 1.3 million

per month in 1998 or 0.4 percent of GDP and in 1999 when additional troops

were deployed at USD 3 million per month or at 0.6 percent of GDP (IMF, 1999).

The country could not spare forex outlays of such magnitude and this

consequently weakened the currency, again with pernicious effect on price

stability. There was intense pressure on the currency and in a bid to increase the

flows of foreign currency which were dwindling at precariously low levels, the

central bank reintroduced widespread import controls and banned foreign

currency accounts. This decision was futile as in the first quarter of 1999 the

central bank, had to devalue the currency by 50 percent to trade at USD1:

ZWD38 from USD1: ZWD25

The aforementioned events marked a period in which the inept handling of

government expenditure instigated investors to lose confidence in the currency

with the consequence that they ran away from it thereby putting a pressure on

the exchange rate, which fuelled inflation throughout the increase in the prices

of import. Thus a characterization of inflation in this first period is that it was of

a cost-push nature.


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2000 to 2003: Land reform and destruction of the production

base

The presidents rhetoric on confiscation of white-owned farms waselevated to the next level in early 2000, when war veterans, who

courtesy of the gratuities, were now the paramilitary wing of the ruling

Zanu PF party, started invading white-owned farms as part of an

elaborate scheme by Zanu PF to terrorize people to vote for it in the

parliamentary election in July 2000. The government delineated the

parameters of its land redistribution policy embodied in the fast-trackland reform programme under which 300,000 households and 51,000

black commercial farmers would be apportioned the previously white-

owned commercial farmers.

As a result of the upheavals on the farms, agricultural output felldramatically from the level of 18 percent of GDP in 2000 to 14 percent of

GDP in 2002 (World Bank, 2008).

The government could not service its multilateral debts obligations andas a result in October 2000, the World Bank suspended any extra lendingto Zimbabwe and the IBRD and IDA facilities due to non-payment of over

six months (World Bank, 2000). On the other hand the government could

not import essential raw materials and fuel as a result of the declining

forex inflow, which further fed into falling production with the result that

2004, total foreign currency earnings from the export of goods and

services had declined to less than half the 1996 peak of USD3,169 million

(World Bank, 2008). In purported retaliation to the perceived

deterioration of human rights conditions in the country, the EuropeanUnion imposed sanctions against the country, after Mugabe had elected a

Swedish election observer before the 2002 elections. Under the terms of

the sanctions, the European Union suspended budgetary support to

Zimbabwe and terminated financial support for all projects except those

in direct support of the population.


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According to this analysis the major driver of inflation in this period was the

shrinkage in aggregate supply sparked by the fall in the agriculture, which then

spread to other sectors of the economy. The shrinkage in aggregate supply

would ceteris paribus, trigger price increases which ignite the price-wage

spiral.

2004 to 2007: Pseudo-Keynesian economics

On 1 December 2003 a new governor, Gono was appointed to head thecentral bank. The battle against inflation, which now stood at 263 percent

on a year on year basis at the end of 2003, became Gonos first priority.

He undertook money-targeting framework as the monetary policystrategy and consequently set up a Framework for Liquidity

Management, which was to contain money supply growth to levels

consistent with inflation targets.

The interest rate was the operational target and it was raised acutely inthe first quarter of 2004, reaching a peak of 5,242 percent annually in

March 2004. Inflation which had soared from about 20 percent in

December 1997 to a peak of 623 percent in January 2004, decelerated

sharply from March to around 130 percent at the end of 2004 (RBZ,2007).

The high real interest rates and an increasingly overvalued officialexchange rate was also putting pressure on domestic producers and

exporters, and in a move to bail out the ailing industries, the central bank

started engaging in quasi fiscal activities. The quasi-fiscal-activities went

beyond the operational realm of a normal central bank and had the effect

of undoing the ephemeral achievements in the inflation battle and firmly

set course for the drive towards hyperinflation. At the height of these

quasi-fiscal activities, money (M1) was increasing at the rate of 66,659

percent annually in 2007 and this feed to demand pull inflation during this

period.


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The ravaging inflation standing at over 1000 percent meant that thepeople had to carry large sums of currency to conduct the simplest of

transaction and on 1 August 2006, the Zimbabwean dollar was replaced

by a new Zimbabwean dollar exchanging at a ratio of 1000:1 and it was

subsequently devalued against the USD. A transition period of 21 daysduring which both currencies co-existed was given and thereafter the old

notes ceased to be legal tender.

Given the cosmetic nature of the reforms, there was no sign of recession in

inflation and Zimbabwes formally entered hyperinflation in March 2007 when

month-on-month inflation reached 50.54 percent and year-on-year 2,200

percent (RBZ, 2007). This period thus, marked the countrys accelerated drive

towards hyperinflation fuelled by the central banks quasi-fiscal activities meant

to fund the political campaigns of an unpopular ruling regime. In terms ofeconomics, the characterization of inflation in this period is therefore of a

demand pull nature.

Monetizing the Fiscal Deficit

In the first few months of 2000, the Mugabe government began anaggressive money-printing campaign with ZW$30B, hoping to use the

newly-minted money to purchase foreign currency to pay the IMF arrears,as well as to fund massive amounts of government spending. Monetary

production remained relatively linear until a veritable explosion in 2000,

flooding the monetary supply and causing hyperinflation the likes of

which hadnt been seen since Weimar Germany in the 1920s.

As the quantity theory of money and common sense tells us, the result ofthis excess printing with GDP in decline was that the value of the

Zimbabwean dollar collapsed exponentially. As a result, the cost of living

skyrocketed in tandem with the monetary supply. In the thirty years of

independence, the cost of living has increased by a factor of

97,072,150,785.138%, and 2,152,473,377.841% since January of 2000.

(For comparison, the United States CPI has increased 274.68% since 1980

and 126.69% since January of 2000.)


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Estimates vary to the extent of this hyperinflation, as measuring such abehemoth has become all but impossible. In November of 2008, prices

were doubling every 24 hours. The calculation of the CPI in Zimbabwe is

an extremely precarious endeavor, as many of the goods in the basket are

nowhere to be found. Supermarket shelves once full of meat, grain, andsupplies have become completely empty.

Residents of Zimbabwe have taken to substituting whatever is availablefor the disposable goods they once purchased: instead of using

newspapers for fire kindling, residents use the abundance of worthless

banknotes; instead of using toilet paper, residents have again taken to

banknotes.

As a result of increasingly worthless bills, Mugabes government has beenprinting ever larger denominations. In 1980, denominations of 2, 5, 10,

and 20 dollars were printed, with the addition of a $50 banknote in 1994

and a $100 note in 1995. When inflation started becoming problematic,

$500 notes were introduced in 2001 a $1,000 in 2003 and when inflation

started becoming systemic, denominations up to $100,000 were

introduced in 2006 and by July, these were trading for less than US$0.20

on the black market.

When inflation started becoming endemic, the central bank of Zimbabweissued a $10,000,000 bill in January of 2008 at the time insufficient to buy

a hamburger in a Harare restaurant. It was followed by a$100,000,000,000 note in July of 2008 (Zimbabwe introduces), and a

$100,000,000,000,000 bill the worlds first in January of 2009. At the time

of its issue, it was worth about US$30 (Zimbabwe rolls) a stark contrast to

the $1.59 the Zimbabwean dollar was worth at independence and no cash

register on the planet is capable of ringing up so many zeroes.


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4. Effects of Hyperinflation

One hundred trillion dollarsthats 100,000,000,000,000is the largest

denomination of currency ever issued .The Zimbabwean government issued theZ$100 trillion bill in early 2009, among the last in a series of ever higher

denominations distributed as inflation eroded purchasing power. When

Zimbabwe attained independence in 1980, Z$2, Z$5, Z$10 and Z$20

denominations circulated, replaced three decades later by bills in the thousands

and ultimately in the millions and trillions as the government sought to prop up a

weakening economy amid spiraling inflation.

Shortly after the Z$100 trillion note began circulating, the Zimbabwean dollar was

officially abandoned in favor of foreign currencies. From 2007 to 2008, the locallegal tender lost more than 99.9 percent of its value (Hanke 2008). This marked a

reversal of fortune from independence, when the value of one Zimbabwe dollar

equaled US$1.54.

Zimbabwes extreme and uncontrollable inflation made it the firstand so far

onlycountry in the 21st century to experience a hyperinflationary episode.

Hyperinflation devastates people and countries. Zimbabwe, once considered the

breadbasket of Africa, was reduced to the continents beggar within a few years;

its citizens were pushed into poverty and often forced to emigrate. The countrysexperience shows how a relatively self-sustaining nation at independence fell

victim to out-of-control inflation and the severe erosion of wealth. The causes of

Zimbabwes hyperinflation, its effects and how it was stopped are particularly

instructive.

In his seminal work, Phillip Cagan defined hyperinflation as beginning when

monthly inflation rates initially exceed 50 percent. It ends in the month before the

rate declines below 50 percent, where it must remain for at least a year (Cagan

1956). Zimbabwe entered the hyperinflationary era in March 2007; the periodended when the nation abandoned its currency in 2009 (Chart 1). The evolution

of the Zimbabwean dollar in the post-independence period is shown in the

timeline.

Bouts of hyperinflation are mostly accompanied by rapidly increasing money

supply needed to finance large fiscal deficits arising from war, revolution, the end

of empires and the establishment of new states. Hyperinflation, as Cagan defined

it, initially appeared during the French Revolution, when the monthly rate peaked

at 143 percent in December 1795. More than a century elapsed beforehyperinflation appeared again. During the 20th century, hyperinflation occurred

28 times, often associated with the monetary chaos involving two world wars and

the collapse of communism (Bernholz 2003). Zimbabwes hyperinflation of 2007

09 represents the worlds 30thoccurrence as well as the continents second bout

(after a 199194 episode in the Congo).


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4.1 Before and During Hyperinflation

To trace the economys deterioration and understand the causes of the extreme

price changes, it helps to compare 1980 (when newly independent Zimbabwe left

behind its identity as Rhodesia) with 200809, the height of hyperinflation.

At independence, annual inflation was 5.4 percent; month-to-month inflation

averaged 0.5 percent. The largest currency denomination was Z$20, and the

Zimbabwean dollar was the most widely used currencyinvolved in more than 95

percent of transactions. Officially, US$1 bought Z$0.647, and real GDP in 1980

grew 14.6 percent over 1979 levels (Chart 2). On a per capita basis, real GDP

(purchasing-power-parity adjusted) in 2005 prices equaled US$232; the

unemployment rate was 10.8 percent in 1982.

By July 2008, when Zimbabwes Central Statistical Office released its last inflation

figures for that year, the month-over-month (non annualized) rate had reached

2,600.2 percentmore than 231 million percent on a year-over-year basis. The

International Monetary Fund (IMF) put the annual inflation rate in September

2008 at 489 billion percent, with some independent analysts estimating it much

higher. The largest currency denomination in 2009 was the Z$100 trillion note.

However, the most widely used currencies in almost all transactions were the U.S.

dollar, South African rand and the Botswana pula. At the official exchange rate on

Dec. 31, 2008, US$1 traded for Z$4 million, although parallel black-market rates

were much greater. In 2008, real GDP contracted 17 percent (Chart 2), with per

capita GDP at US$13641 percent below what it was at independence. The

unemployment rate stood at 94 percent, according to a report by the U.N. Office

for the Coordination of Humanitarian Affairs, and the country became the bread

beggar of Africa (Makochekanwa 2009).


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4.2 Zimbabwes Inflation Nightmare

Zimbabwes economic crisis and subsequent hyperinflation were preceded by

several years of economic decline and mounting public debt. Weakening began

in 1999, coinciding with periods of drought that adversely affected the

agriculturally dependent nation. External debt as a share of GDP increased to

119 percent in 2008 from 11 percent in 1980. Land reallocation in 2000 and

2001, which redistributed large agricultural tracts, depressed commercial

farming output. Output fell 50 percent between 2000 and 2009, led by a

decline in the countrys major foreign-exchange cash crop, tobacco, which slid

64 percent in 2008 from 2000 levels (Chart 3). Commercial production ofmaize,the national staple, dropped 76 percent during the same time(FAOSTAT Database 2011).

Uncontrolled government spending accompanied the weak economy. In 1997,

authorities approved unbudgeted expenditures, amounting to almost 3

percent of GDP, for bonuses to approximately 60,000 independence war

veterans. Efforts to cover the payment with tax increases failed after trade-

union-led protests, prompting the government to begin monetization (printing

additional money to pay for the expenditure). In 1998, the government

spent another significant share of gross national product (GNP) for its

involvement in Congos civil war. Additionally, authorities faced debt

obligations to the IMF. In 2006, Zimbabwe still had substantial overdue

obligations to the IMFs Poverty Reduction and Growth Facility and Exogenous

Shocks Facility Trust, totaling about US$119 million. These funds were

intended to foster development and reduce poverty.

The dire economic conditions prompted a wave of emigration to neighboringcountries, contributing to a population and labor force decline beginning in

2003 (Chart 4). Zimbabwe emigration totaled 761,226, about 6 percent of the

population in 2005. This number increased to 1.25 million in 2010,

representing 9.9 percent of the population (World Bank 2008 and 2011). With

a shrinking tax base and revenue that could not support expenditures and


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obligations, the government printed yet more money. Currency lost value at

exponential rates amid an imbalance between economic output and the

increasing money supply (Chart 5).

Hyperinflation and economic troubles were so profound that by 2008, theywiped out the wealth of citizens and set the country back more than a half

century. In 1954, the average GDP per capita for Southern Rhodesia was

US$151 per year (based on constant 2005 U.S.-dollar purchasing power- parity

rates). In 2008, that average declined to US$136, eliminating gains over the

preceding 53 years.

4.3 Starving Billionaires

Zimbabwes official annual rate of inflation exceeded 231 million percent in

2008, quickly eroding the currencys purchasing power. The Economic Times

newspaper noted on June 13, 2008, that a loaf of bread now costs what 12

new cars did a decade ago, and a small pack of locally produced coffee beans

costs just short of 1 billion Zimbabwe dollars. A decade ago, that sum would

have bought 60 new cars.

At the height of the hyperinflation, prices doubled every few days, and

Zimbabweans struggled to keep their cash resources from evaporating.

Businesses still quoted prices in local currency but revised them several times a

day. A minibus driver taking commuters into Harare still charged passengers in

local currency but at a higher price on the evening trip home. And he changed

his local notes into hard currency three times a day.

The government attempted to quell rampant inflation by controlling the prices

of basic commodities and services in 2007 and 2008. Authorities forced

merchantssometimes with police forceto lower prices that exceeded setceilings. This quickly produced food shortages because businesses couldnt

earn a profit selling at government-mandated prices and producers of goods

and services cut output to avoid incurring losses. People waited in long lines at

fuel stations and stores. While supermarket shelves were empty, a thriving

black market developed where goods traded at much higher prices.


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Underground markets for foreign exchange also sprang up in back offices and

parking lots where local notes were converted to hard currencies at much

more than the official central bank rate.

Some commodities, such as gasoline, were exclusively traded in U.S. dollars orthe South African rand, and landlords often accepted groceries and food items

as barter for rent. When currency is almost worthless, the use of foreign

exchange or barter frequently occursa situation previously experienced in

Germany, Hungary and Argentina in the 20th century.

4.4 Hyperinflation Consequences

Zimbabwe is the first country to experience a hyperinflationary episode in the

21st century. Hyperinflation is rare and often associated with wars, regimechange and unstable political and economic environments where revenues are

insufficient to cover government expenditures and printing more currency

becomes a solution. Excess money supply not backed by economic growth

leads to a loss of confidence in the currency, which ultimately can result in

abandonment of the local currency in favor of foreign ones.

Hyperinflation produces adverse impacts wealth and savings are wiped out

within months, and prices of basic commodities become out of reach to many,

especially those on fixed incomes. Governments often implement price

controls in an attempt to control inflation. This frequently leads to shortages,

as producers opt for alternative markets to avoid the mandated price ceilings

that dont cover production costs. A thriving black market ensues, where basic

goods and foreign currencies are traded at premium prices. Economies also

resort to barter and trade in foreign currencies when the home currency has

lost its value.

In Zimbabwe, the printing presses worked overtime, delivering ever-increasingcurrency denominations that lost value faster than they could be printed. The

Z$100 trillion bill, issued in January 2009, was the largest denomination in the

history of money. At the time of issuance, this note was worth US$300,11 and

its value diminished by the hour as the inflation rate soared in the millions.


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Recently, this historic Z$100 trillion bill has become a hot commodity among

collectors and novelty buyers, selling for about US$5 on eBay. This historical

keepsake is a stark reminder of what happens to a currency when inflation and

fiscal balances go unchecked.

4.5 Impact on Economy

Financial investors fled the country, concerned that other businessesmay go the way of the farms, with foreign direct investment falling 99%

between 1998 and 2001.

Since there were no more land titles, there was no collateral for bankloans, causing dozens of banks to collapse. The farmland lost an

estimated three quarters of its value between 2000 and 2001,

amounting to $5.3B in losses.

The collapse of the farmland led to widespread famine and, since it nolonger had any owners, the prized irrigation system was dug for scrap,

some being melted for coffin handles ,one of the few growth industries

left in the country.

As figure shows, agricultural production declined sharply, with 2005output being only slightly above 1992 ,one of the worst drought years on

record. For years afterward, Mugabe used this drought to explain the

drop-off in production. Real GDP followed agriculture, as could be

expected in a primarily agrarian economy. In 2007, it returned to the

level it had been at independence 27 years earlier.

4.6 Loan Sanctions by IMF

Following the drought of 1992, the government of Zimbabwe beganreceiving loans from the International Monetary Fund. Repayment of

these loans had been relatively steady until 2000, when the confiscation

of farms and the subsequent slowdown of production caused the

government to fall behind in its payments.


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In response to the deteriorating political and economic situation inZimbabwe, President Bush signed into law the Zimbabwe Democracy

and Economic Recovery Act of 2001, enacting sanctions against the

nation by instructing the US Treasury and US members of internationalfinancial institutions to oppose the extension of any loans to Zimbabwe.

The IMF declared Zimbabwe ineligible to access Fund resources andsuspended the remaining payment support. Mugabe and the

government of Zimbabwe have repeatedly cited these sanctions as the

primary cause of their economic collapse. In 2004, due to their inability

to repay the loans, Zimbabwe was expelled from the IMF, and

repayments effectively ceased (IMF).

4.7 Impact of Revaluation

As one might imagine, Mugabes monetary policies have beendevastating for the people of Zimbabwe.

Limited support to the countrys orphaned and vulnerable children, with79 per cent not receiving any form of external assistance. The country,

once a net exporter of grain and considered the breadbasket of Africa,has been reduced to a nation where the highest denominated bill is

insufficient to buy a loaf of bread.


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5. Timeline of Zimbabwes Downfall

1200-1600s - Rise and decline of the Monomotapa domain, thought to havebeen associated with Great Zimbabwe and to have been involved in gold

mining and international trade.

1830s- Ndebele people fleeing Zulu violence and Boer migration in present-

day South Africa move north and settle in what becomes known as

Matabeleland.

1830-1890s- European hunters, traders and missionaries explore the regionfrom the south. They include Cecil John Rhodes.

1889- Rhodes' British South Africa Company (BSA) gains a British mandate to

colonise what becomes Southern Rhodesia.

Whites settle

1890- Pioneer column of white settlers arrives from south at site of future

capital Harare.

1893- Ndebele uprising against BSA rule is crushed.

1922- BSA administration ends, the white minority opts for self-government.

1930- Land Apportionment Act restricts black access to land, forcing many

into wage labour.

1930-1960s- Black opposition to colonial rule grows. Emergence in the 1960sof nationalist groups - the Zimbabwe African People's Union (Zapu) and the

Zimbabwe African National Union (Zanu).

1953- Britain creates the Central African Federation, made up of Southern

Rhodesia (Zimbabwe), Northern Rhodesia (Zambia) and Nyasaland (Malawi).


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1963- Federation breaks up when Zambia and Malawi gain independence.

Smith declares UDI

1964- Ian Smith of the Rhodesian Front (RF) becomes prime minister, tries to

persuade Britain to grant independence.

1965- Smith unilaterally declares independence under white minority rule,

sparking international outrage and economic sanctions.

1972- Guerrilla war against white rule intensifies, with rivals Zanu and Zapu

operating out of Zambia and Mozambique.

1978- Smith yields to pressure for negotiated settlement. Elections for

transitional legislature boycotted by Patriotic Front made up of Zanu and Zapu.

New government of Zimbabwe Rhodesia, led by Bishop Abel Muzorewa, fails

to gain international recognition. Civil war continues.

1979- British-brokered all-party talks at Lancaster House in London lead to a

peace agreement and new constitution, which guarantees minority rights.

Independence

1980- Veteran pro-independence leader Robert Mugabe and his Zanu party

win British-supervised independence elections. Mugabe is named prime

minister and includes Zapu leader Joshua Nkomo in his cabinet. Independence

on 18 April is internationally recognised.

1982- Mugabe sacks Nkomo, accusing him of preparing to overthrow the

government. North Korean-trained Fifth Brigade deployed to crush rebellion by

pro-Nkomo ex-guerrillas in Midlands and Matabeleland provinces.

Government forces are accused of killing thousands of civilians over next few

years.


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1987- Mugabe, Nkomo merge their parties to form Zanu-PF, ending the

violence in southern areas.

1987- Mugabe changes constitution, becomes executive president.

1991- The Commonwealth adopts the Harare Declaration at its summit in

Zimbabwe, reaffirming its aims of fostering international peace and security,

democracy, freedom of the individual and equal rights for all.

1998- Economic crisis accompanied by riots and strikes.

1999- Economic crisis persists, Zimbabwe's military involvement in DR

Congo's civil war becomes increasingly unpopular.

Opposition Movement for Democratic Change (MDC) formed.

Farm seizures

2000 February - President Mugabe suffers defeat in referendum on draftconstitution.

Squatters seize hundreds of white-owned farms in an ongoing and violent

campaign to reclaim what they say was stolen by settlers.

2000 June - Parliamentary elections: Zanu-PF narrowly fights off a challengefrom the opposition Movement for Democratic Change (MDC) led by Morgan

Tsvangirai, but loses its power to change the constitution.

2001 May - Defence Minister Moven Mahachi killed in a car crash - thesecond minister to die in that way in a month.

2001 July - Finance Minister Simba Makoni publicly acknowledges economiccrisis, saying foreign reserves have run out and warning of serious food

shortages. Most western donors, including the World Bank and the IMF, have

cut aid because of President Mugabe's land seizure programme.


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2002 February - Parliament passes a law limiting media freedom. TheEuropean Union imposes sanctions on Zimbabwe and pulls out its election

observers after the EU team leader is expelled.

2002 March - Mugabe re-elected in presidential elections condemned asseriously flawed by the opposition and foreign observers. Commonwealth

suspends Zimbabwe from its councils for a year after concluding that elections

were marred by high levels of violence.

Food shortages

2002 April - State of disaster declared as worsening food shortages threaten

famine.

2002 June - 45-day countdown for some 2,900 white farmers to leave theirland begins, under terms of a land-acquisition law passed in May.

Protests

2003 March - Widely-observed general strike is followed by arrests andbeatings.

2003 June - Opposition Movement for Democratic Change (MDC) leaderMorgan Tsvangirai is arrested twice during a week of opposition protests. He is

charged with treason, adding to an existing treason charge from 2002 over an

alleged plot to kill President Mugabe.

2003 November - Canaan Banana, Zimbabwe's first black president, dies

aged 67.

2003 December - Zimbabwe pulls out of Commonwealth after organisationdecides to extend suspension of country indefinitely.


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2004 March - A group of mercenaries allegedly on the way to EquatorialGuinea to stage a coup is intercepted after landing at Harare airport. Their

leader, British national Simon Mann, is sentenced to seven years in prison for

attempting to buy guns.

2004 October - Opposition leader Morgan Tsvangirai is acquitted of treasoncharges relating to an alleged plot to kill President Mugabe. He faces a

separate treason charge.

2005 January - The US labels Zimbabwe as one of the world's six "outposts oftyranny". Zimbabwe rejects the statement.

2005 March - Ruling Zanu-PF party wins two-thirds of the votes in

parliamentary polls. Main opposition party says election was rigged against it.

Urban "clean-up"

2005 May-July - Tens of thousands of shanty dwellings and illegal street stallsare destroyed as part of a "clean-up" programme. The UN estimates that the

drive has left about 700,000 people homeless.

2005 August - Prosecutors drop remaining treason charges againstopposition leader Morgan Tsvangirai.

2005 November - Ruling Zanu-PF party wins an overwhelming majority ofseats in a newly-created upper house of parliament, the Senate.

The opposition MDC splits over its leader's decision to boycott the poll.

2005 December - UN humanitarian chief Jan Egeland says Zimbabwe is in

"meltdown".

Galloping inflation

2006 May - Year-on-year inflation exceeds 1,000%. New banknotes, withthree noughts deleted from their values, are introduced in August.


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2006 September - Riot police disrupt a planned demonstration against thegovernment's handling of the economic crisis. Union leaders are taken into

custody and later hospitalised, allegedly after being tortured.

2006 December - Ruling ZANU-PF party approves a plan to move presidentialpolls from 2008 to 2010, effectively extending Mr Mugabe's rule by two years.

2007 February - Rallies, demonstrations banned for three months. The ban isextended in May.

2007 March - Opposition leader Morgan Tsvangirai is hospitalised after hisarrest at a rally. One man is shot dead as riot police move to disperse the

gathering.

2007 May - Warnings of power cuts for up to 20 hours a day while electricityis diverted towards agriculture.

2007 June - Ruling ZANU-PF and opposition MDC hold preliminary talks inSouth Africa.

Elections crisis

2008 March - Presidential and parliamentary elections. Opposition MDCclaims victory.

2008 May - Electoral body says Tsvangirai won most votes in presidential poll,but not enough to avoid a run-off against Mugabe.

2008 June - Run-off goes ahead. Mugabe declared winner. Tsvangirai pulledout days before poll, complaining of intimidation.

Russia, China veto a Western-backed UN Security Council resolution to impose

sanctions.


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Power-sharing deal

2008 July - EU, US widen sanctions against Zimbabwe's leaders.

2008 Sept - Mugabe, Tsvangirai sign power-sharing agreement.Implementation stalls over who gets top ministerial jobs.

2008 December - Zimbabwe declares national emergency over a choleraepidemic and the collapse of its health care system.

2009 January - Government allows use of foreign currencies to try stemhyperinflation.

2009 February - Tsvangirai is sworn in as prime minister, after protractedtalks over formation of government.

2009 March - Tsvangirai's wife is killed in a car crash. He is injured.

Retail prices fall for the first time after years of hyperinflation.

2009 June - Constitutional review begins.

Tsvangirai tours Europe and US to drum up donor support.

2009 September - One year after power-sharing deal, MDC remainsfrustrated and alleges persecution and violence against members.

Arrival of EU and US delegations seen as signs of thaw in foreign relations.

Both maintain stance on targeted sanctions.

IMF provides $400 million support as part of G20 agreement to help member

states.

2009 October - Mugabe calls for new start to relations with West.


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2010 January - Prime Minister Morgan Tsvangirai urges the easing oftargeted sanctions, saying the unity government's progress should be

rewarded.

Zimbabwe's High Court rejects a regional court ruling against PresidentMugabe's land-reform programme.

2010 March- New rule forces foreign-owned businesses to sell majoritystake to locals.

2010 June- Commercial farmers say they are under a renewed wave ofattacks.

2010 August- Zimbabwe resumes official diamond sales, amid controversyover reported rights abuses at the Marange diamond fields.

2010 September- Premier Tsvangirai alleges ruling party instigating violenceat public consultations on new constitution.

2010 December- Ruling Zanu-PF party nominates President Mugabe ascandidate for next presidential race.

Mugabe's wife Grace takes legal action over claims released by WikiLeaks thatshe profited from illegal diamond trading.

2011 February- European Union eases sanctions on Zimbabwe by removingthe names of 35 of President Mugabe's supporters from a list of people whose

assets had been frozen.

Rights groups report rise in violence against opposition supporters.

2011 March- Prime Minister Tsvangirai says unity government renderedimpotent by ZANU-PF violence and disregard for power-sharing deal.

Twenty diplomatic missions in Zimbabwe call for an end to violence in a joint

statement.


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2011 August- General Solomon Mujuru, one of the country's most seniorpoliticians, dies in a mysterious house fire.

2011 November- The Kimberly Process, which regulates the global diamond

industry, lifts a ban on the export of diamonds from two of Zimbabwe'sMarange fields.

2011 December- President Mugabe tells his Zanu-PF party conference thathe'll run in the next elections. He condemns the current power-sharing

government as a monster.

2012 February- European Union lifts sanctions on some prominentZimbabweans, while retaining the travel restrictions and the freeze on the

assets of President Mugabe.

Constitutional Select Committee completes draft; inter-party quarrelling over

its content continues.

2012 March- Zimplats, one of the world's biggest platinum producers, agreesin principle to transfer a majority stake in its local company to Zimbabwean

shareholders to comply with a new law.

2012 April - Political violence reportedly on the rise, with MDC complainingthat its rallies have repeatedly been shut down.

2012 May- UN human rights commissioner Navi Pillay calls on the West to liftsanctions targeting prominent Zimbabwean figures, saying the measures were

hurting the country's most vulnerable people.


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6. Challenges and Policy Options after

Hyperinflation

Following a decade of economic decline and hyperinflation during 2007-08,

Zimbabwes economy has started to grow. The nascent economic recovery has

been supported by a significant improvement in economic policies, but

important policy challenges and significant vulnerabilities remain to be

addressed.

In late 2008, hyperinflation led to abandonment of the Zimbabwe dollar intransactions and de facto widespread dollarization. The official recognition of

the demise of the Zimbabwe dollar took place in February 2009, when

authorities established a multicurrency system. Under this system,

transactions in hard foreign currencies are authorized, payments of taxes are

mandatory in foreign exchange, and the exchange system largely is liberalized.

Since the abolition of all surrender requirements on foreign exchange proceeds

on March 19, 2009, there has not been a functioning foreign exchange market

for Zimbabwe dollars. Bank accounts denominated in Zimbabwe dollars

(equivalent to about US$6 million at the exchange rate of Z$35 quadrillion perUS$1) are dormant. Use of the Zimbabwe dollar as domestic currency has

been discontinued until 2012.

While five foreign currencies have been granted official status, the U.S. dollar

has become the principal currency. Budget revenue estimates and the budget

expenditure allocations for 2009 were denominated in U.S. dollars, and the

subsequent budget for 2010 was also denominated in U.S. dollars. For noncash

transactions, the market is exhibiting a strong preference for the U.S. dollar:

banks estimate that some four-fifths of all transactions are taking place in U.S.

dollars, including most wage payments. Furthermore, stock exchange trading

takes place in U.S. dollars, the payments systems operate in U.S. dollars, and the

banking system and the Reserve Bank of Zimbabwe (RBZ) maintain accounting in

U.S. dollars. In cash transactions, the U.S. dollar is the currency of choice, but

the rand is prevalent in the South of the country, and it also circulates in the rest


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of the country, in particular coins. Wider circulation of the rand is prevented by

South Africas capital account control. Currencies other than the U.S. dollar and

the rand have limited circulation in Zimbabwe.

The multicurrency system has provided significant benefits. In particular, it

fostered the remonetization of the economy and financial reintermediation,

helped enforce fiscal discipline by precluding inflationary financing of the

budget, and brought greater transparency in pricing and accounting after a long

period of high inflation. As a result, the price level in U.S. dollars declined during

2009, while the economy started to recover.

The multicurrency system also poses a number of challenges. First, prices and

wages are usually agreed and quoted in U.S. dollars, while South Africa is

Zimbabwes main trading partner and country of origin of capital inflows.

Movements in the U.S. dollar/rand exchange rate therefore have considerable

effects on Zimbabwes competitiveness and international investment position.

Second, shortages of small-denomination U.S. dollar banknotes and coins pose

difficulties for retailers. Third, some politicians have expressed concern that loss

of the national currency and seigniorage is an undesirable erosion of sovereignty

and monetary independence.

The government considers the multicurrency monetary regime a temporary

arrangement until 2012 at least. Therefore, the pros and cons of maintaining the

multicurrency regime indefinitely are not discussed. Despite the remaining

challenges, the multicurrency regime could continue to operate with certain

improvements until a new regime is chosen. The necessary improvements

include aligning legislation, including the RBZ Act, with the prevailing practice of

use of multiple currencies, making exchange controls more transparent, and

faciltating the supply of coins, possibly with an agreement with South Africa.

Zimbabwe has been experiencing a fragile recovery since early 2009. The jump

start in growth has so far been consumption-led, but Zimbabwes export sector,

in particular mining, could potentially recover quickly and provide much needed

fiscal revenues to a cash-strapped government with large external obligations.


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Zimbabwe continues to run large current account deficits financed by short term

and volatile capital inflows and accumulation of arrears. Zimbabwe is in debt

distress: external debtof which about 64 percent corresponds to external

arrears is projected to be about 151 percent of GDP by 2015.


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7. Current situation

In January 2009, Zimbabwe government abandoned the Zimbabwe dollar and

allowed trading in US dollars or other foreign currencies. Since February 2,2009 Zimbabwe has adopted hard currencies for transactions. On March 19,

2009, the South African rand was announced as the reference currency.

Zimbabwe dollar-denominated currency is not functional, and there is no

functioning foreign exchange market for Zimbabwe dollars. In April 2009,

Zimbabwe abandoned printing of the Zimbabwean dollar, and the South

African rand and US dollar became the standard currencies for exchange. The

de facto exchange arrangement is classified as other managed exchange

arrangement. And the government does not intend to reintroduce the

currency until 2010.

Due to this the inflation came to down drastically and is now reached the level

of deflation. The month-on-month inflation rate in May was -1%, compared

with -1.1% in April. Food prices declined more slowly in May, with the month-

on-month rate for food and non-alcoholic beverages inflation at -0.84%,

compared with -2.91% in April. Since trading in foreign currency was allowed,

Zimbabwe's once-deserted shops are again fully stocked with food. But even

with prices falling, few people can afford to buy food in a country where the

unemployment rate is estimated at 94%.Early this month, the United NationsDevelopment Programme appealed for $718-million, which includes food aid

for about half the population. The unity government formed in February

between long-ruling President Robert Mugabe and his one-time rival, Prime

Minister Morgan Tsvangirai, is trying to convince donors to give $8.5-billion to

revive the economy and the civil service. Norway announced an increase in aid

to about $31-million, while Germany has promised nearly $28-million through

the World Bank. AFP. US and other Western countries say they are still

concerned that Mugabe has not made enough political reforms.

Zimbabwe's economy is growing despite continuing political uncertainty.

Following a decade of contraction from 1998 to 2008, Zimbabwe's economy

recorded real growth of 6% in 2011. However, the government of Zimbabwe

still faces a number of difficult economic problems, including infrastructure

and regulatory deficiencies, ongoing indigenization pressure, policy
http://en.wikipedia.org/wiki/South_African_randhttp://en.wikipedia.org/wiki/South_African_randhttp://en.wikipedia.org/wiki/US_dollarhttp://en.wikipedia.org/wiki/US_dollarhttp://en.wikipedia.org/wiki/South_African_randhttp://en.wikipedia.org/wiki/South_African_rand


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uncertainty, a large external debt burden, and insufficient formal employment.

Zimbabwe's 1998-2002 involvement in the war in the Democratic Republic of

the Congo drained hundreds of millions of dollars from the economy. The

government's subsequent land reform program, characterized by chaos and

violence, badly damaged the commercial farming sector, the traditional sourceof exports and foreign exchange and the provider of 400,000 jobs, turning

Zimbabwe into a net importer of food products. Until early 2009, the Reserve

Bank of Zimbabwe routinely printed money to fund the budget deficit, causing

hyperinflation. Dollarization in early 2009 - which allowed currencies such as

the Botswana pula, the South Africa rand, and the US dollar to be used locally-

ended hyperinflation and restored price stability but exposed structural

weaknesses that continue to inhibit broad-based growth.


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8. Reference

www.google.com www.wikipedia.com Globalization & Monetary Policy Institute 2011 Federal Bank of Dallas Costs and Causes of Zimbabwes Crisis www.cgdev.org The Zimbabwe Papers
http://www.google.com/http://www.google.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.cgdev.org/http://www.cgdev.org/http://www.cgdev.org/http://www.cgdev.org/http://www.wikipedia.com/http://www.google.com/


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