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F.Y B.com (Accounting & Finance)
COMMERCE PROJECT BY - KEDAR BHOIR (07) VIKAS KHADE (23) MEET GALA (56)
We would like to express our greatest gratitude to the people who have helped 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
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 Dollarization……………………………………………………08 4. Effects of Hyperinflation…………………………………………………………………………….14 4.1 Before and During Hyperinflation…………………………………………………..15 4.2 Zimbabwe’s Inflation Nightmare…………………………………………………….16 4.3 Starving Billionaires………………………………………………………………………..17 4.4 Hyperinflation Consequences…………………………………………………………18 4.5 Impact on Economy……………………………………………………………………….19 4.6 Loan Sanctions by IMF .………………………………………………………………….20 4.7 Impact of Revaluation…………………………………………………………………….20 5. Timeline of Zimbabwe’s Downfall………………………………………………………………21 6. Challenges and Policy Options after Hyperinflation……………………………………31 7. Current situation………………………………………………………………………………………..34 8. Reference…………………………………………………………………………………………………..37
With only 7% of the land. tools most importantly. During that time. seeds. Prior to independence. strong banking. With the Zimbabwean dollar replacing the Rhodesian dollar at par and trading for US$1. the economic future looked bright for the fledgling democracy of Zimbabwe. real GDP growth averaged a strong 4. a sophisticated manufacturing base. Rhodesia had 86% of the area’s dams and 93% of the reservoir surface area at the time of independence. The Colony of Southern Rhodesia was created in 1923. The farms employed some 350. developing one of the most sophisticated water delivery systems in Southern Africa. The rule of law was secure as much of the population trusted the police and believed in equitable treatment in the courts. 4 . Around 70% of the Rhodesia’s vast farmland had been run by about 4.1.500 white farmers who produced cash crops such as tobacco and cotton. Rhodesia had long been considered the jewel of Africa as it was rich in fertile farmlands and raw material such as gold and chromium.59. the new nation of Zimbabwe rose as Rhodesia gained independence from the British Empire. Introduction of Zimbabwe In 1980. Rhodesia had been administrated by Great Britain during the late 19th century’s Race for Africa as part of the British South Africa Company. Rhodesia enacted the Land Apportionment Act in the year 1930. granting selfrule to the white colonists. the water delivery system. serving an agricultural sector that was the backbone of a thriving economy: strong enough to feed all of its seven million people and export the rest to the world. forbidding land ownership for blacks outside of tribal reserve areas. With low crime. and booming tourism. while leaving blacks disenfranchised.3%. the British built an agricultural empire in the colony.000 black workers and provided money for local schools and clinics. These white-owned farms supported: a flourishing banking sector loaning funds for machinery.
the results are usually rigged by the ruling ZANU’s. While Rhodesia’s white-owned farms thrived. Elections are held from time to time. This land was without title. with the goal of redistributing the white-owned farms to black farmers. and then only in lower ministerial positions. Once that end had been achieved. and won election to the post of Prime Minister in the first election following independence. with Mugabe seizing new powers relegated to the position of Executive President of Zimbabwe and effectively becoming Dictator. groundnuts. and the electorate rejected a 1999 referendum to amend the constitution to allow it. In a nation where there was only 1 white for every 22 blacks Zimbabwe. the two groups had divergent philosophies about the governance of the country: Mugabe’s group had Maoist beliefs. In 1960s.000 black farmers were crowded into eroded and over-farmed land unconnected to the irrigation grid. a militant organization that fought the British in the Rhodesian Bush War throughout the 1970s. producing corn. intimidation. and outright murder. and other staples. The ZANU (Zimbabwe African National Union) fought this inequitable bi-racial rule side by side with the Zimbabwe African People’s Union. comrades in arms united only by their desire to expel the British from their country. the two opposing groups have been embroiled in a bitter civil war for control of the nation. Mugabe was hailed as a national hero. the position of Prime Minister was abolished. Since then. as a result of the Land Apportionment Act some 840. while the ZAPU (Zimbabwe African people’s Union) was Marxist. and squabbling over land rights between villagers was rampant. The nation’s constitution forbade the seizure of land without proper compensation. until Robert Mugabe came to power. the subject of land redistribution was blocked until 1990. As part of the Lancaster House Agreement . the nation’s independence agreement with Britain . When the war concluded in 1979. 5 . Mugabe sought to institute land reform. with Mugabe’s ZANU retaining control through force. Mugabe became prominent and became the Secretary General of the Zimbabwe African National Union.That is. In 1987. hadn’t seen blacks in a position of power until 1979 .
According to Milton Friedman. One of the most famous examples of hyperinflation occurred in Germany between January 1922 and November 1923. 2.a. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless. as the currency loses its value. Because of this. it is “always and everywhere a monetary phenomenon”. resulting in an imbalance in the supply and demand for the money. And. Hyperinflation often occurs when there is a loss of confidence in a currency's ability to maintain its value in the aftermath. 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. It is usually thought in the terms of Consumer Price Index (or CPI).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.2. Left unchecked this causes prices to increase. 2. the average price level increased by a factor of 20 billion. and they do this by raising their prices.2 Difference between Inflation and Hyperinflation Inflation refers to any sustained increase in the “cost of living” expenditures. agree that proposition. Most economists whether monetarists or Keynesians. A working definition is that a country is in hyperinflation when its annual inflation rate reaches 1000% p. sellers demand a risk premium to accept the currency. hyperinflation refers to an “out of control” increase of prices. Another difference is that while inflation works towards securing the economic stability of a country. hyperinflation seeks to demobilize the same economy 6 . Inflation and Hyperinflation Inflation is defined as a continuing and rapid rise in the price level. resulting in diminishing value of a country’s currency. doubling every 28 hours. By some estimates.
The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. In other words. hyperinflation is generally associated with paper money as it can easily used to increase the money supply. For example.further into the web of debts. the price of three eggs was 100 billion dollars and the price of a dozen tomatoes varied between 3-5 million dollars. In Zimbabwe. Interest rates. while making the afflicted area anathema to investment. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period. there are irrational increases in prices which not at all help in any sense. the economy was in such a condition that the prices of even the basic items are not less than few million dollars. even if the period is short. causing the monetary base (hard currency). Hyperinflation can be triggered as a result of the following conditions: The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. failing the government to achieve its targets. wages and prices are linked to a price index and the cumulative inflation rate over three years approaches. 100%. It effectively destroys the purchasing power of the private and public savings. Amounts of local currency held are immediately invested to maintain the purchasing power. to escape the country. thereby. 7 . This shows that during hyperinflation. distorts the economy in favor of extreme consumption. or exceeds. and hoarding of real assets. Prices may be quoted in that foreign currency.
announced plans to compulsorily acquire white-owned commercial farms. 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 1996 levels. Mugabe. and on that basis in September 1997. The second populist decision followed in November 1997 when the president. the World Bank temporarily withdrew a USD62. again without elaboration on the financing side of the transaction. The central bank had to intervene and raise interest rates by six percentage points within that single month.000 war veterans were granted ZWD 50. The stock market also plummeted and the index was down by 46 percent by day end from the peak August levels.000 at the time) plus a monthly pension of approximately USD 125 per month outside the budget.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. on what is now known as Black Friday´ in Zimbabwean economic history. As an ad hoc decision.000 each (approximately USD 3. Road to Hyperinflation and Dollarization 1997 to 1999: Political vulnerability and economic breakdown In August 1997. approximately 60. The exchange rate 8 . Concerns were raised pertaining to the financing side of the transaction in view of an already precarious fiscal position.3. 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.9 percent budget deficit in the 18 months leading to December1998. 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 government had intended to accommodate the gratuities payment through tax increases in the 1998 budget but countrywide protests orchestrated by the trade unions forced the government to backpedal and resolve to monetization of the transaction.
Thus a characterization of inflation in this first period is that it was of a cost-push nature. who was under attack by Rwandan and Ugandan backed rebels.4 percent of GDP and in 1999 when additional troops were deployed at USD 3 million per month or at 0. 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.continued to depreciate uncontrollably. 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. The country could not spare forex outlays of such magnitude and this consequently weakened the currency. to the Democratic Republic of Congo (DRC) to back the discredited leader. 1999). In September 1998 the president agreed to send 11. thus the 1997 financial and currency turbulence set the stage for a long and potentially long slump in the real economy. This decision was futile as in the first quarter of 1999 the central bank. 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.3 million per month in 1998 or 0. which fuelled inflation throughout the increase in the prices of import.6 percent of GDP (IMF.000 troops under the SADC protocol. Kabila. the central bank reintroduced widespread import controls and banned foreign currency accounts. A letter written by the finance ministry to the IMF seeking funds puts the funds to finance the war at USD 1. again with pernicious effect on price stability. 9 .
which further fed into falling production with the result that 2004. Under the terms of the sanctions.000 households and 51. were now the paramilitary wing of the ruling Zanu PF party.2000 to 2003: Land reform and destruction of the production base The president’s rhetoric on confiscation of white-owned farms was elevated to the next level in early 2000. 10 . The government delineated the parameters of its land redistribution policy embodied in the fast-track land reform programme under which 300. 2000). 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. after Mugabe had elected a Swedish election observer before the 2002 elections. agricultural output fell dramatically from the level of 18 percent of GDP in 2000 to 14 percent of GDP in 2002 (World Bank. the World Bank suspended any extra lending to Zimbabwe and the IBRD and IDA facilities due to non-payment of over six months (World Bank. the European Union imposed sanctions against the country. The government could not service its multilateral debts obligations and as a result in October 2000. who courtesy of the gratuities. 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. As a result of the upheavals on the farms. when war veterans.000 black commercial farmers would be apportioned the previously whiteowned commercial farmers. In purported retaliation to the perceived deterioration of human rights conditions in the country. 2008). the European Union suspended budgetary support to Zimbabwe and terminated financial support for all projects except those in direct support of the population. 2008). On the other hand the government could not import essential raw materials and fuel as a result of the declining forex inflow.
At the height of these quasi-fiscal activities.242 percent annually in March 2004.659 percent annually in 2007 and this feed to demand pull inflation during this period. became Gono’s first priority. The battle against inflation. reaching a peak of 5. 2007). The interest rate was the operational target and it was raised acutely in the first quarter of 2004. 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. The high real interest rates and an increasingly overvalued official exchange rate was also putting pressure on domestic producers and exporters. which now stood at 263 percent on a year on year basis at the end of 2003. decelerated sharply from March to around 130 percent at the end of 2004 (RBZ. which was to contain money supply growth to levels consistent with inflation targets. trigger price increases which ignite the price-wage spiral. and in a move to bail out the ailing industries.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. 11 . which then spread to other sectors of the economy. Gono was appointed to head the central bank. the central bank started engaging in quasi fiscal activities. 2004 to 2007: Pseudo-Keynesian economics On 1 December 2003 a new governor. The shrinkage in aggregate supply would ceteris paribus. Inflation which had soared from about 20 percent in December 1997 to a peak of 623 percent in January 2004. He undertook money-targeting framework as the monetary policy strategy and consequently set up a Framework for Liquidity Management’. money (M1) was increasing at the rate of 66.
flooding the monetary supply and causing hyperinflation the likes of which hadn’t been seen since Weimar Germany in the 1920s. This period thus. In terms of economics. the result of this excess printing with GDP in decline was that the value of the Zimbabwean dollar collapsed exponentially. hoping to use the newly-minted money to purchase foreign currency to pay the IMF arrears. 2007). In the thirty years of independence. Monetary production remained relatively linear until a veritable explosion in 2000. the cost of living has increased by a factor of 97.150. the characterization of inflation in this period is therefore of a demand pull nature. the Mugabe government began an aggressive money-printing campaign with ZW$30B. the United States CPI has increased 274.377.69% since January of 2000. As a result. and 2. marked the country’s accelerated drive towards hyperinflation fuelled by the central bank’s quasi-fiscal activities meant to fund the political campaigns of an unpopular ruling regime. there was no sign of recession in inflation and Zimbabwe’s formally entered hyperinflation in March 2007 when month-on-month inflation reached 50. the cost of living skyrocketed in tandem with the monetary supply. 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.072. A transition period of 21 days during which both currencies co-existed was given and thereafter the old notes ceased to be legal tender. (For comparison.68% since 1980 and 126.200 percent (RBZ.841% since January of 2000.138%.785. The ravaging inflation standing at over 1000 percent meant that the people had to carry large sums of currency to conduct the simplest of transaction and on 1 August 2006. As the quantity theory of money and common sense tells us. Monetizing the Fiscal Deficit In the first few months of 2000.) 12 .54 percent and year-on-year 2.473.152. as well as to fund massive amounts of government spending. Given the cosmetic nature of the reforms.
with the addition of a $50 banknote in 1994 and a $100 note in 1995. and a $100. prices were doubling every 24 hours. denominations of 2. Estimates vary to the extent of this hyperinflation. residents use the abundance of worthless banknotes.000. At the time of its issue. $500 notes were introduced in 2001 a $1. As a result of increasingly worthless bills. as many of the goods in the basket are nowhere to be found. When inflation started becoming endemic. Residents of Zimbabwe have taken to substituting whatever is available for the disposable goods they once purchased: instead of using newspapers for fire kindling. the central bank of Zimbabwe issued a $10. Supermarket shelves once full of meat. It was followed by a $100.20 on the black market.000. these were trading for less than US$0. instead of using toilet paper.000 in 2003 and when inflation started becoming systemic. grain. and 20 dollars were printed.000 bill the world’s first in January of 2009.000 were introduced in 2006 and by July. Mugabe’s government has been printing ever larger denominations. 5. as measuring such a behemoth has become all but impossible.59 the Zimbabwean dollar was worth at independence and no cash register on the planet is capable of ringing up so many zeroes.000. denominations up to $100. The calculation of the CPI in Zimbabwe is an extremely precarious endeavor.000. When inflation started becoming problematic. In November of 2008. In 1980. it was worth about US$30 (Zimbabwe rolls) a stark contrast to the $1.000. 10.000. 13 . and supplies have become completely empty.000 note in July of 2008 (Zimbabwe introduces).000 bill in January of 2008 at the time insufficient to buy a hamburger in a Harare restaurant. residents have again taken to banknotes.
the Zimbabwean dollar was officially abandoned in favor of foreign currencies. often associated with the monetary chaos involving two world wars and the collapse of communism (Bernholz 2003). Bouts of hyperinflation are mostly accompanied by rapidly increasing money supply needed to finance large fiscal deficits arising from war. where it must remain for at least a year (Cagan 1956). Effects of Hyperinflation One hundred trillion dollars—that’s 100. when the monthly rate peaked at 143 percent in December 1795. the period ended when the nation abandoned its currency in 2009 (Chart 1). Hyperinflation. Shortly after the Z$100 trillion note began circulating. as Cagan defined it. In his seminal work. revolution. Z$2. among the last in a series of ever higher denominations distributed as inflation eroded purchasing power.4. During the 20th century.000.54. the end of empires and the establishment of new states. 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). was reduced to the continent’s beggar within a few years. The causes of Zimbabwe’s hyperinflation. Phillip Cagan defined hyperinflation as beginning when monthly inflation rates initially exceed 50 percent. When Zimbabwe attained independence in 1980. its effects and how it was stopped are particularly instructive. Zimbabwe’s extreme and uncontrollable inflation made it the first—and so far only—country in the 21st century to experience a hyperinflationary episode. This marked a reversal of fortune from independence. 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. Zimbabwe entered the hyperinflationary era in March 2007. From 2007 to 2008. It ends in the month before the rate declines below 50 percent. hyperinflation occurred 28 times. once considered the breadbasket of Africa. Zimbabwe.The Zimbabwean government issued the Z$100 trillion bill in early 2009.000. Z$5. The country’s experience shows how a relatively self-sustaining nation at independence fell victim to out-of-control inflation and the severe erosion of wealth. More than a century elapsed before hyperinflation appeared again. Z$10 and Z$20 denominations circulated. The evolution of the Zimbabwean dollar in the post-independence period is shown in the timeline. 14 . its citizens were pushed into poverty and often forced to emigrate. initially appeared during the French Revolution.9 percent of its value (Hanke 2008). when the value of one Zimbabwe dollar equaled US$1.000—is the largest denomination of currency ever issued . Hyperinflation devastates people and countries.000. the local legal tender lost more than 99.
and the country became the bread beggar of Africa (Makochekanwa 2009). At the official exchange rate on Dec.5 percent. 15 . The unemployment rate stood at 94 percent. with some independent analysts estimating it much higher. real GDP contracted 17 percent (Chart 2). month-to-month inflation averaged 0. and the Zimbabwean dollar was the most widely used currency—involved in more than 95 percent of transactions. real GDP (purchasing-power-parity adjusted) in 2005 prices equaled US$232. when Zimbabwe’s Central Statistical Office released its last inflation figures for that year. dollar. and real GDP in 1980 grew 14. US$1 bought Z$0. 31. it helps to compare 1980 (when newly independent Zimbabwe left behind its identity as Rhodesia) with 2008–09.2 percent—more than 231 million percent on a year-over-year basis. By July 2008.647. However.4.600. US$1 traded for Z$4 million.N. the height of hyperinflation. The International Monetary Fund (IMF) put the annual inflation rate in September 2008 at 489 billion percent. On a per capita basis. according to a report by the U. 2008. Office for the Coordination of Humanitarian Affairs. South African rand and the Botswana pula.4 percent. annual inflation was 5. At independence. Officially. The largest currency denomination in 2009 was the Z$100 trillion note.S. In 2008. the most widely used currencies in almost all transactions were the U.8 percent in 1982. the unemployment rate was 10. the month-over-month (non annualized) rate had reached 2.6 percent over 1979 levels (Chart 2). with per capita GDP at US$136—41 percent below what it was at independence.1 Before and During Hyperinflation To trace the economy’s deterioration and understand the causes of the extreme price changes. although parallel black-market rates were much greater. The largest currency denomination was Z$20.
In 1998. representing 9. about 6 percent of the population in 2005. totaling about US$119 million. the national staple. Efforts to cover the payment with tax increases failed after tradeunion-led protests. authorities approved unbudgeted expenditures. tobacco. Uncontrolled government spending accompanied the weak economy. The dire economic conditions prompted a wave of emigration to neighboring countries.9 percent of the population (World Bank 2008 and 2011).000 independence war veterans.2 Zimbabwe’s Inflation Nightmare Zimbabwe’s economic crisis and subsequent hyperinflation were preceded by several years of economic decline and mounting public debt. which slid 64 percent in 2008 from 2000 levels (Chart 3). This number increased to 1. contributing to a population and labor force decline beginning in 2003 (Chart 4). the government spent another significant share of gross national product (GNP) for its involvement in Congo’s civil war. Zimbabwe still had substantial overdue obligations to the IMF’s Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust. External debt as a share of GDP increased to 119 percent in 2008 from 11 percent in 1980. Land reallocation in 2000 and 2001. Commercial production of maize.226. authorities faced debt obligations to the IMF. which redistributed large agricultural tracts. amounting to almost 3 percent of GDP. With a shrinking tax base and revenue that could not support expenditures and 16 . prompting the government to begin monetization (printing additional money to “pay” for the expenditure). In 2006.4. depressed commercial farming output. In 1997. led by a decline in the country’s major foreign-exchange cash crop. dropped 76 percent during the same time (FAOSTAT Database 2011). Output fell 50 percent between 2000 and 2009. coinciding with periods of drought that adversely affected the agriculturally dependent nation.25 million in 2010. Weakening began in 1999. Zimbabwe emigration totaled 761. Additionally. These funds were intended to foster development and reduce poverty. for bonuses to approximately 60.
-dollar purchasing power. 2008. While supermarket shelves were empty. 4. At the height of the hyperinflation. and Zimbabweans struggled to keep their cash resources from evaporating. A minibus driver taking commuters into Harare still charged passengers in local currency but at a higher price on the evening trip home.obligations. In 2008. they wiped out the wealth of citizens and set the country back more than a half century. A decade ago. 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. the government printed yet more money. This quickly produced food shortages because businesses couldn’t earn a profit selling at government-mandated prices and producers of goods and services cut output to avoid incurring losses. the average GDP per capita for Southern Rhodesia was US$151 per year (based on constant 2005 U. People waited in long lines at fuel stations and stores. Businesses still quoted prices in local currency but revised them several times a day. 17 .parity rates). eliminating gains over the preceding 53 years. that sum would have bought 60 new cars. Hyperinflation and economic troubles were so profound that by 2008. The Economic Times newspaper noted on June 13.3 Starving Billionaires Zimbabwe’s official annual rate of inflation exceeded 231 million percent in 2008. prices doubled every few days. a thriving black market developed where goods traded at much higher prices. that average declined to US$136. quickly eroding the currency’s purchasing power. Authorities forced merchants—sometimes with police force—to lower prices that exceeded set ceilings. Currency lost value at exponential rates amid an imbalance between economic output and the increasing money supply (Chart 5). The government attempted to quell rampant inflation by controlling the prices of basic commodities and services in 2007 and 2008. In 1954. And he changed his local notes into hard currency three times a day.S.
were exclusively traded in U. the use of foreign exchange or barter frequently occurs—a situation previously experienced in Germany. was the largest denomination in the history of money. Excess money supply not backed by economic growth leads to a loss of confidence in the currency. and landlords often accepted groceries and food items as barter for rent. and prices of basic commodities become out of reach to many. This frequently leads to shortages. as producers opt for alternative markets to avoid the mandated price ceilings that don’t cover production costs.11 and its value diminished by the hour as the inflation rate soared in the millions.4 Hyperinflation Consequences Zimbabwe is the first country to experience a hyperinflationary episode in the 21st century. where basic goods and foreign currencies are traded at premium prices. dollars or the South African rand. Hyperinflation is rare and often associated with wars. which ultimately can result in abandonment of the local currency in favor of foreign ones. Governments often implement price controls in an attempt to control inflation. Hungary and Argentina in the 20th century. When currency is almost worthless.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. this note was worth US$300. In Zimbabwe. such as gasoline. regime change and unstable political and economic environments where revenues are insufficient to cover government expenditures and printing more currency becomes a solution. The Z$100 trillion bill. 18 . Economies also resort to barter and trade in foreign currencies when the home currency has lost its value. issued in January 2009. the printing presses worked overtime. especially those on fixed incomes. A thriving black market ensues. Some commodities. delivering ever-increasing currency denominations that lost value faster than they could be printed.S. Hyperinflation produces adverse impacts— wealth and savings are wiped out within months. 4. At the time of issuance.
one of the few growth industries left in the country.6 Loan Sanctions by IMF Following the drought of 1992. The collapse of the farmland led to widespread famine and. with foreign direct investment falling 99% between 1998 and 2001. 19 . it returned to the level it had been at independence 27 years earlier. 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. causing dozens of banks to collapse. the government of Zimbabwe began receiving loans from the International Monetary Fund.one of the worst drought years on record.3B in losses.5 Impact on Economy Financial investors fled the country. The farmland lost an estimated three quarters of its value between 2000 and 2001. with 2005 output being only slightly above 1992 . this historic Z$100 trillion bill has become a hot commodity among collectors and novelty buyers. the prized irrigation system was dug for scrap. when the confiscation of farms and the subsequent slowdown of production caused the government to fall behind in its payments. as could be expected in a primarily agrarian economy. As figure shows. concerned that other businesses may go the way of the farms. agricultural production declined sharply. Since there were no more land titles. there was no collateral for bank loans. some being melted for coffin handles . Real GDP followed agriculture.Recently. 4. since it no longer had any owners. Mugabe used this drought to explain the drop-off in production. Repayment of these loans had been relatively steady until 2000. amounting to $5. 4. In 2007. For years afterward.
In 2004. with 79 per cent not receiving any form of external assistance. and repayments effectively ceased (IMF). 20 . enacting sanctions against the nation by instructing the US Treasury and US members of international financial institutions to oppose the extension of any loans to Zimbabwe. once a net exporter of grain and considered the ³breadbasket of Africa´. due to their inability to repay the loans. 4. Limited support to the country’s orphaned and vulnerable children. has been reduced to a nation where the highest denominated bill is insufficient to buy a loaf of bread. The IMF declared Zimbabwe ineligible to access Fund resources and suspended the remaining payment support.7 Impact of Revaluation As one might imagine. The country. President Bush signed into law the Zimbabwe Democracy and Economic Recovery Act of 2001. Mugabe’s monetary policies have been devastating for the people of Zimbabwe. Mugabe and the government of Zimbabwe have repeatedly cited these sanctions as the primary cause of their economic collapse. Zimbabwe was expelled from the IMF. In response to the deteriorating political and economic situation in Zimbabwe.
1922 . 1893 .the Zimbabwe African People's Union (Zapu) and the Zimbabwe African National Union (Zanu).Britain creates the Central African Federation. 1930 . They include Cecil John Rhodes.BSA administration ends. 1830s .Pioneer column of white settlers arrives from south at site of future capital Harare.Rise and decline of the Monomotapa domain.Land Apportionment Act restricts black access to land. forcing many into wage labour. thought to have been associated with Great Zimbabwe and to have been involved in gold mining and international trade. Whites settle 1890 .Rhodes' British South Africa Company (BSA) gains a British mandate to colonise what becomes Southern Rhodesia. Timeline of Zimbabwe’s Downfall 1200-1600s . made up of Southern Rhodesia (Zimbabwe). Northern Rhodesia (Zambia) and Nyasaland (Malawi). 1953 .European hunters. traders and missionaries explore the region from the south. Emergence in the 1960s of nationalist groups .Ndebele uprising against BSA rule is crushed. 21 .Ndebele people fleeing Zulu violence and Boer migration in presentday South Africa move north and settle in what becomes known as Matabeleland. 1889 . the white minority opts for self-government.Black opposition to colonial rule grows.5. 1830-1890s . 1930-1960s .
Veteran pro-independence leader Robert Mugabe and his Zanu party win British-supervised independence elections. New government of Zimbabwe Rhodesia.1963 . tries to persuade Britain to grant independence. led by Bishop Abel Muzorewa. 1978 . 1979 .Mugabe sacks Nkomo.Smith yields to pressure for negotiated settlement. Government forces are accused of killing thousands of civilians over next few years. 22 .British-brokered all-party talks at Lancaster House in London lead to a peace agreement and new constitution. fails to gain international recognition.Smith unilaterally declares independence under white minority rule. 1972 . 1982 . with rivals Zanu and Zapu operating out of Zambia and Mozambique. Mugabe is named prime minister and includes Zapu leader Joshua Nkomo in his cabinet. Smith declares UDI 1964 . sparking international outrage and economic sanctions. North Korean-trained Fifth Brigade deployed to crush rebellion by pro-Nkomo ex-guerrillas in Midlands and Matabeleland provinces. which guarantees minority rights. 1965 . Civil war continues. Independence 1980 .Guerrilla war against white rule intensifies. Elections for transitional legislature boycotted by Patriotic Front made up of Zanu and Zapu. accusing him of preparing to overthrow the government.Federation breaks up when Zambia and Malawi gain independence.Ian Smith of the Rhodesian Front (RF) becomes prime minister. Independence on 18 April is internationally recognised.
Defence Minister Moven Mahachi killed in a car crash . Squatters seize hundreds of white-owned farms in an ongoing and violent campaign to reclaim what they say was stolen by settlers. 1999 .Parliamentary elections: Zanu-PF narrowly fights off a challenge from the opposition Movement for Democratic Change (MDC) led by Morgan Tsvangirai. 1991 . becomes executive president.Economic crisis accompanied by riots and strikes.Mugabe. 1998 .1987 . reaffirming its aims of fostering international peace and security. have cut aid because of President Mugabe's land seizure programme. freedom of the individual and equal rights for all. 2000 June . Nkomo merge their parties to form Zanu-PF.President Mugabe suffers defeat in referendum on draft constitution.the second minister to die in that way in a month. 2001 May . Most western donors.Mugabe changes constitution. democracy. ending the violence in southern areas. 1987 . 2001 July . Zimbabwe's military involvement in DR Congo's civil war becomes increasingly unpopular. Opposition Movement for Democratic Change (MDC) formed. Farm seizures 2000 February . 23 .The Commonwealth adopts the Harare Declaration at its summit in Zimbabwe.Economic crisis persists. including the World Bank and the IMF. saying foreign reserves have run out and warning of serious food shortages.Finance Minister Simba Makoni publicly acknowledges economic crisis. but loses its power to change the constitution.
2002 June .Zimbabwe pulls out of Commonwealth after organisation decides to extend suspension of country indefinitely.2002 February .Parliament passes a law limiting media freedom. under terms of a land-acquisition law passed in May. 2003 November . 2003 December . Protests 2003 March .Canaan Banana. He is charged with treason.900 white farmers to leave their land begins. The European Union imposes sanctions on Zimbabwe and pulls out its election observers after the EU team leader is expelled. Food shortages 2002 April .Mugabe re-elected in presidential elections condemned as seriously flawed by the opposition and foreign observers. 2003 June .45-day countdown for some 2. 24 . adding to an existing treason charge from 2002 over an alleged plot to kill President Mugabe.Opposition Movement for Democratic Change (MDC) leader Morgan Tsvangirai is arrested twice during a week of opposition protests. Commonwealth suspends Zimbabwe from its councils for a year after concluding that elections were marred by high levels of violence. 2002 March .State of disaster declared as worsening food shortages threaten famine.Widely-observed general strike is followed by arrests and beatings. dies aged 67. Zimbabwe's first black president.
Galloping inflation 2006 May . New banknotes. is sentenced to seven years in prison for attempting to buy guns. 2005 March . 2005 August .000 people homeless. Urban "clean-up" 2005 May-July .Opposition leader Morgan Tsvangirai is acquitted of treason charges relating to an alleged plot to kill President Mugabe.Ruling Zanu-PF party wins an overwhelming majority of seats in a newly-created upper house of parliament. 2005 January . The UN estimates that the drive has left about 700.Tens of thousands of shanty dwellings and illegal street stalls are destroyed as part of a "clean-up" programme. 2005 November . Their leader. 25 .2004 March . the Senate. He faces a separate treason charge.Prosecutors drop remaining treason charges against opposition leader Morgan Tsvangirai. 2004 October . The opposition MDC splits over its leader's decision to boycott the poll. Main opposition party says election was rigged against it. 2005 December .000%. are introduced in August. with three noughts deleted from their values. Zimbabwe rejects the statement.UN humanitarian chief Jan Egeland says Zimbabwe is in "meltdown".Year-on-year inflation exceeds 1.Ruling Zanu-PF party wins two-thirds of the votes in parliamentary polls. British national Simon Mann.The US labels Zimbabwe as one of the world's six "outposts of tyranny".A group of mercenaries allegedly on the way to Equatorial Guinea to stage a coup is intercepted after landing at Harare airport.
The ban is extended in May. 2007 February . 2007 June . 26 . Elections crisis 2008 March . 2007 May . 2006 December . Union leaders are taken into custody and later hospitalised. Opposition MDC claims victory. 2008 May . China veto a Western-backed UN Security Council resolution to impose sanctions. complaining of intimidation.Ruling ZANU-PF party approves a plan to move presidential polls from 2008 to 2010.Run-off goes ahead. Mugabe declared winner. but not enough to avoid a run-off against Mugabe.Electoral body says Tsvangirai won most votes in presidential poll.Opposition leader Morgan Tsvangirai is hospitalised after his arrest at a rally. effectively extending Mr Mugabe's rule by two years. Tsvangirai pulled out days before poll. allegedly after being tortured.Ruling ZANU-PF and opposition MDC hold preliminary talks in South Africa. One man is shot dead as riot police move to disperse the gathering. 2007 March .Presidential and parliamentary elections. Russia.2006 September . 2008 June .Riot police disrupt a planned demonstration against the government's handling of the economic crisis.Warnings of power cuts for up to 20 hours a day while electricity is diverted towards agriculture.Rallies. demonstrations banned for three months.
after protracted talks over formation of government.Mugabe calls for new start to relations with West.Tsvangirai is sworn in as prime minister.Power-sharing deal 2008 July . Implementation stalls over who gets top ministerial jobs. 2009 October . 2009 February . 27 .Government allows use of foreign currencies to try stem hyperinflation. 2009 March . 2009 June . 2009 January . Arrival of EU and US delegations seen as signs of thaw in foreign relations. Tsvangirai sign power-sharing agreement. 2008 December . 2008 Sept . MDC remains frustrated and alleges persecution and violence against members. He is injured.EU.Mugabe. 2009 September . Both maintain stance on targeted sanctions.One year after power-sharing deal. US widen sanctions against Zimbabwe's leaders. Tsvangirai tours Europe and US to drum up donor support. Retail prices fall for the first time after years of hyperinflation. IMF provides $400 million support as part of G20 agreement to help member states.Zimbabwe declares national emergency over a cholera epidemic and the collapse of its health care system.Tsvangirai's wife is killed in a car crash.Constitutional review begins.
Premier Tsvangirai alleges ruling party instigating violence at public consultations on new constitution. 2010 August . 2011 February .New rule forces foreign-owned businesses to sell majority stake to locals. 2011 March . saying the unity government's progress should be rewarded.2010 January .European Union eases sanctions on Zimbabwe by removing the names of 35 of President Mugabe's supporters from a list of people whose assets had been frozen.Prime Minister Morgan Tsvangirai urges the easing of targeted sanctions.Commercial farmers say they are under a renewed wave of attacks. 2010 December . 2010 June . 2010 March . Twenty diplomatic missions in Zimbabwe call for an end to violence in a joint statement. Mugabe's wife Grace takes legal action over claims released by WikiLeaks that she profited from illegal diamond trading. 2010 September . 28 . Rights groups report rise in violence against opposition supporters.Prime Minister Tsvangirai says unity government rendered impotent by ZANU-PF violence and disregard for power-sharing deal. amid controversy over reported rights abuses at the Marange diamond fields.Zimbabwe resumes official diamond sales.Ruling Zanu-PF party nominates President Mugabe as candidate for next presidential race. Zimbabwe's High Court rejects a regional court ruling against President Mugabe's land-reform programme.
agrees in principle to transfer a majority stake in its local company to Zimbabwean shareholders to comply with a new law. one of the world's biggest platinum producers. 2012 March . 2012 February . while retaining the travel restrictions and the freeze on the assets of President Mugabe. Constitutional Select Committee completes draft. one of the country's most senior politicians. which regulates the global diamond industry.President Mugabe tells his Zanu-PF party conference that he'll run in the next elections.2011 August . 2012 May .Zimplats. inter-party quarrelling over its content continues. saying the measures were hurting the country's most vulnerable people.UN human rights commissioner Navi Pillay calls on the West to lift sanctions targeting prominent Zimbabwean figures. 2012 April . dies in a mysterious house fire. with MDC complaining that its rallies have repeatedly been shut down.The Kimberly Process. 2011 December . 29 . He condemns the current power-sharing government as a monster. 2011 November .General Solomon Mujuru. lifts a ban on the export of diamonds from two of Zimbabwe's Marange fields.Political violence reportedly on the rise.European Union lifts sanctions on some prominent Zimbabweans.
dollars. Since the abolition of all surrender requirements on foreign exchange proceeds on March 19. In late 2008. Bank accounts denominated in Zimbabwe dollars (equivalent to about US$6 million at the exchange rate of Z$35 quadrillion per US$1) are dormant. the payments systems operate in U. Under this system.S.S. including most wage payments. stock exchange trading takes place in U. the U. but the rand is prevalent in the South of the country.S.S. transactions in hard foreign currencies are authorized. Use of the Zimbabwe dollar as domestic currency has been discontinued until 2012.S. While five foreign currencies have been granted official status. there has not been a functioning foreign exchange market for Zimbabwe dollars. For noncash transactions.S.S. hyperinflation led to abandonment of the Zimbabwe dollar in transactions and de facto widespread dollarization. dollars. dollars. and the exchange system largely is liberalized.S. Challenges and Policy Options after Hyperinflation Following a decade of economic decline and hyperinflation during 2007-08. but important policy challenges and significant vulnerabilities remain to be addressed. Budget revenue estimates and the budget expenditure allocations for 2009 were denominated in U. dollars. dollars. and the banking system and the Reserve Bank of Zimbabwe (RBZ) maintain accounting in U. Furthermore. Zimbabwe’s economy has started to grow. dollar is the currency of choice. dollars. dollar has become the principal currency. the market is exhibiting a strong preference for the U. dollar: banks estimate that some four-fifths of all transactions are taking place in U. and the subsequent budget for 2010 was also denominated in U. when authorities established a multicurrency system.S. The nascent economic recovery has been supported by a significant improvement in economic policies. and it also circulates in the rest 31 . The official recognition of the demise of the Zimbabwe dollar took place in February 2009. payments of taxes are mandatory in foreign exchange. 2009. the U. In cash transactions.6.
in particular mining. Third. Therefore. helped enforce fiscal discipline by precluding inflationary financing of the budget. Movements in the U. while the economy started to recover. dollar/rand exchange rate therefore have considerable effects on Zimbabwe’s competitiveness and international investment position. the price level in U. Wider circulation of the rand is prevented by South Africa’s capital account control. and brought greater transparency in pricing and accounting after a long period of high inflation. Despite the remaining challenges.S. and faciltating the supply of coins. including the RBZ Act. while South Africa is Zimbabwe’s main trading partner and country of origin of capital inflows. possibly with an agreement with South Africa. some politicians have expressed concern that loss of the national currency and seigniorage is an undesirable erosion of sovereignty and monetary independence. prices and wages are usually agreed and quoted in U. it fostered the remonetization of the economy and financial reintermediation.S. dollars. dollar banknotes and coins pose difficulties for retailers. could potentially recover quickly and provide much needed fiscal revenues to a cash-strapped government with large external obligations. The necessary improvements include aligning legislation. with the prevailing practice of use of multiple currencies.S. The government considers the multicurrency monetary regime a temporary arrangement until 2012 at least. making exchange controls more transparent. shortages of small-denomination U.S. First. In particular. the pros and cons of maintaining the multicurrency regime indefinitely are not discussed. Zimbabwe has been experiencing a fragile recovery since early 2009. Currencies other than the U. dollars declined during 2009.of the country. Second. The multicurrency system has provided significant benefits. 32 . but Zimbabwe’s export sector.S. As a result. in particular coins. dollar and the rand have limited circulation in Zimbabwe. The multicurrency system also poses a number of challenges. the multicurrency regime could continue to operate with certain improvements until a new regime is chosen. The jump start in growth has so far been consumption-led.
Zimbabwe is in debt distress: external debt²of which about 64 percent corresponds to external arrears is projected to be about 151 percent of GDP by 2015.Zimbabwe continues to run large current account deficits financed by short term and volatile capital inflows and accumulation of arrears. 33 .
– AFP. policy 34 . The de facto exchange arrangement is classified as other managed exchange arrangement. 2009. while Germany has promised nearly $28-million through the World Bank. Zimbabwe's economy is growing despite continuing political uncertainty. Food prices declined more slowly in May. the South African rand was announced as the reference currency. But even with prices falling. Following a decade of contraction from 1998 to 2008. Since February 2. with the monthon-month rate for food and non-alcoholic beverages inflation at -0. Due to this the inflation came to down drastically and is now reached the level of deflation. Norway announced an increase in aid to about $31-million. the United Nations Development Programme appealed for $718-million. the government of Zimbabwe still faces a number of difficult economic problems. Zimbabwe abandoned printing of the Zimbabwean dollar. Since trading in foreign currency was allowed. Zimbabwe's economy recorded real growth of 6% in 2011. and there is no functioning foreign exchange market for Zimbabwe dollars. compared with -1. However. Zimbabwe government abandoned the Zimbabwe dollar and allowed trading in US dollars or other foreign currencies. On March 19. The month-on-month inflation rate in May was -1%. few people can afford to buy food in a country where the unemployment rate is estimated at 94%. US and other Western countries say they are still concerned that Mugabe has not made enough political reforms. The unity government formed in February between long-ruling President Robert Mugabe and his one-time rival. 2009 Zimbabwe has adopted hard currencies for transactions. is trying to convince donors to give $8.84%. In April 2009. ongoing indigenization pressure. And the government does not intend to reintroduce the currency until 2010.Early this month.91% in April.5-billion to revive the economy and the civil service. Zimbabwe dollar-denominated currency is not functional.1% in April. which includes food aid for about half the population.7. Prime Minister Morgan Tsvangirai. and the South African rand and US dollar became the standard currencies for exchange. Current situation In January 2009. including infrastructure and regulatory deficiencies. compared with -2. Zimbabwe's once-deserted shops are again fully stocked with food.
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. causing hyperinflation. badly damaged the commercial farming sector. the traditional source of exports and foreign exchange and the provider of 400. the South Africa rand. and the US dollar to be used locallyended hyperinflation and restored price stability but exposed structural weaknesses that continue to inhibit broad-based growth. characterized by chaos and violence.which allowed currencies such as the Botswana pula.uncertainty. Until early 2009. The government's subsequent land reform program. 35 . a large external debt burden. the Reserve Bank of Zimbabwe routinely printed money to fund the budget deficit. Dollarization in early 2009 . turning Zimbabwe into a net importer of food products.000 jobs.
google.8.com www.cgdev.org The Zimbabwe Papers 37 . Reference www.wikipedia.com Globalization & Monetary Policy Institute 2011 – Federal Bank of Dallas Costs and Causes of Zimbabwe’s Crisis – www.
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