Zimbabwe’s Hyperinflation basics

Dallas Fed released its annual report-2011.

In the report, Janet Koech of Dallas Fed has written a superb primer on Zimbabwe’s hyperinflation. It looks at the History of country, how it got independence and how the hyperinflation started.

It says though Zimbabwe issued 1 trillion dollar note but the actual currency issued was much larger(see endnote 1):

One hundred trillion dollars—that’s 100,000,000,000,000—is the largest denomination of currency ever issued.1 The Zimbabwean government issued the Z$100 trillion bill in early 2009, among the last in a series of ever higher denominations distributed as inflation eroded purchasing power.

The Z$100 trillion note was issued after two currency reforms—in 2006 and 2008—where a total of 13 zeros were slashed from currency, making the 100 trillion note technically equivalent to 1027 pre-2006 Zimbabwean dollars. By this measure, the Z$100 trillion takes the lead as the largest currency ever issued. The 100 million Hungarian B-pengo (1020 pengo) put into circulation in 1946 is historically recognized as the world’s largest currency—but comes in second when Zimbabwe’s currency revaluations are considered.

What is hyperinflation? When inflation touches 50%:

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 period ended 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 on page 10.

 Zimbabwe’s hyper inflation is the 30th case of hyperinflation:

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 elaps ed before hyperinflation 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). Zimbabwe’s hyperinflation of 2007–09 represents the world’s 30th occurrence as well as the continent’s second bout (after a 1991–94 episode in the Congo).

The history of Zimbabwe and how it got independence is interesting. It became a colony of British in 1922 and got independence in 1965:

During much of the colonial period, from 1890 to 1979, blacks and whites fought over land and political involvement, as the local population resisted marginalization. Several uprisings were mostly quickly ended, the leaders imprisoned. Two political parties that formed in the 1960s proved resilient—the Zimbabwe African National Union (ZANU) under Robert Mugabe and the  Zimbabwe African Peoples Union (ZAPU) under Joshua Nkomo.

In the early 1960s, as colonial rule ended throughout the continent and as African-majority governments assumed control in neighboring Northern Rhodesia (now Zambia) and Nyasaland (now Malawi), the white-minority Southern Rhodesia government led by Ian Smith issued a Unilateral Declaration of Independence from the United Kingdom on Nov. 11, 1965. The move scuttled Britain’s plan for a multiracial democracy, prompting sanctions from the former colonial power, which deemed the independence declaration illegal. Still, the white-minority government claimed nation status as the Republic of Rhodesia, or simply Rhodesia, in 1970.

As whites took over, the blacks revolted. This led to a civil war which led to Mugabe coming to power and he has been in power even since:

A civil war ensued, with African guerrilla groups under ZAPU and ZANU leadership taking up arms from bases in Zambia and  Mozambique. In 1979, an agreement on a new constitution, transitional arrangements and a ceasefire were reached at a conference convened in Lancaster House in London. Following elections the next  February, Mugabe became the first prime minister and formed a coalition government that included former ZAPU leader Nkomo. Zimbabwe became a recognized independent nation on April 18, 1980.The Mugabe government has ruled ever since. 

If one follows  Acemoglu works, if not hyperinflation then other problems were kind of a given in Zimbabwe. Extractive instis first set by colonies and then followed by Mugabe were a perfect recipe for problems ahead.

The paper then goes on to say how this hyperinflation started.

Zimbabwe’s 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 country’s major foreign-exchange cash crop, tobacco, which slid 64 percent in 2008 from 2000 levels (Chart 3). Commercial production of maize 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 Congo’s civil war. Additionally, authorities faced debt obligations to the IMF. In 2006, Zimbabwe still had substantial overdue obligations to the IMF’s Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust, totaling about US$119 million.6 These funds were intended to foster development and reduce poverty. 

Thsi led to mass scale migration which further lowered tax revenues and high deficits. The deficits continued to get monetized by the central bank leading to hyperinflation. So you had the central bank issuing currency notes with billions denomination making most people billionaires. But they were all starving billionaires..

At the height of the hyperinflation, prices doubled every few days, and Zimbabweans struggled to keep their cash resources from evaporating. usinesses 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.8 The government attempted to quell rampant inflation by controlling the prices of basic commodities and services in 2007 and 2008.  Authorities forced merchants—sometimes with police force—to lower prices that exceeded set ceilings. This quickly produced food shortages because businesses couldn’t earn a profit selling to government-mandated prices and producers of goods and services cut output to avoid incurring losses. 

How did it end? Previous hyperinflation ended via 3 ways: independent central bank, credible fiscal regime and exchange rate stabilization. As first two take time, exchange rate stabilization is the option. And exchange rate stabilization means exchaneg rate depreciation.

In late 2008, the Zimbabwe dollar was replaced in transactions by widespread dollarization amid hyperinflation. The official demise of the currency occurred in February 2009, when authorities established a multicurrency system. Transactions in hard foreign currencies were authorized, and payment of taxes in foreign exchange was subsequently allowed.9 While the South African rand, Botswana pula and the U.S. dollar were granted official status,  the U.S. dollar became the principal currency. Budget revenue estimates and planned expenditures for 2009 were denominated in U.S. dollars, and the subsequent budget for 2010 was also set in U.S. dollars. An estimated four-fifths of all transactions in 2010 took place in U.S. dollars, including most wage payments (Kramarenko et al. 2010).

Even after adopting U.S. monetary policy by dollarizing, post-hyperinflation Zimbabwe still faces challenges: rebuilding public finances, instituting and maintaining credible policies to control government spending, reducing poverty and promoting economic growth. Data for 2010 showed encouraging signs of recovery. Real GDP expanded 9 percent from 2009 levels, marking the second year of growth. Inflation subsided to single digits since dollarization and has remained at those levels. According to the Reserve Bank of Zimbabwe, the October 2011 consumer price inflation was 4.2 percent on a year-over-year basis.

A nice account by all means. Covers quite a bit…And has some decent reference list as well…


One Response to “Zimbabwe’s Hyperinflation basics”

  1. Rakshit Says:

    Good One 🙂

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