DOWNFALL OF ZIMBABWE ECONOMY

F.Y B.com (Accounting & Finance)

COMMERCE PROJECT BY - KEDAR BHOIR (07) VIKAS KHADE (23) MEET GALA (56)

ACKNOWLEDGEMENT
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

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

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 19th centurys Race for Africa as part of the British South Africa Company. The Colony of Southern Rhodesia was created in 1923, granting selfrule 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 the backbone 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.

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 where there 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 of Zimbabwe and effectively becoming 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 land reform, 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.

2. Inflation and Hyperinflation

Inflation is defined as a continuing and rapid rise in the price level. According to 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 a currency'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 in diminishing 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

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 all help 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-monetary assets 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 the local 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 for the 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 the cumulative inflation rate over three years approaches, or exceeds, 100%.

3. Road to Hyperinflation and Dollarization

1997 to 1999: Political vulnerability and economic breakdown
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 1996 levels. 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 the government 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

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 SADC protocol, 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.

2000 to 2003: Land reform and destruction of the production base

The presidents rhetoric on confiscation of white-owned farms was elevated 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-track land reform programme under which 300,000 households and 51,000 black commercial farmers would be apportioned the previously whiteowned commercial farmers. As a result of the upheavals on the farms, agricultural output fell dramatically 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 and as a result in October 2000, 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, 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 European Union 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 the central 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 policy strategy 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 in the 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 official exchange 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 the people 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 days during 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 of economics, 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 an aggressive 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 of this 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 a behemoth 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, and supplies have become completely empty. Residents of Zimbabwe have taken to substituting whatever is available for 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 been printing 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 Zimbabwe issued 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 the Z$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 local legal 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 countrys experience 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 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. 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 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). Zimbabwes hyperinflation of 2007 09 represents the worlds 30th occurrence 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 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 tradeunion-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 neighboring countries, 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, they wiped 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 set ceilings. 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 or the 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, regime change 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-increasing currency 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 businesses may 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 bank loans, 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 no longer 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 2005 output 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 began receiving 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 in Zimbabwe, 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 international financial institutions to oppose the extension of any loans to Zimbabwe. The IMF declared Zimbabwe ineligible to access Fund resources and suspended 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 been devastating for the people of Zimbabwe. Limited support to the countrys orphaned and vulnerable children, with 79 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 have
been 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 presentday South Africa move north and settle in what becomes known as Matabeleland.

1830-1890s - European hunters, traders and missionaries explore the region

from 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 1960s

of 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 draft
constitution. 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 challenge

from 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 - the
second minister to die in that way in a month.

2001 July - Finance Minister Simba Makoni publicly acknowledges economic

crisis, 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. The

European 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 as

seriously 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 their
land begins, under terms of a land-acquisition law passed in May.

Protests
2003 March - Widely-observed general strike is followed by arrests and
beatings.

2003 June - Opposition Movement for Democratic Change (MDC) leader

Morgan 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 organisation

decides to extend suspension of country indefinitely.

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2004 March - A group of mercenaries allegedly on the way to Equatorial

Guinea 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 treason

charges 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 of
tyranny". 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 stalls
are 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 against

opposition leader Morgan Tsvangirai.

2005 November - Ruling Zanu-PF party wins an overwhelming majority of

seats 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, with
three noughts deleted from their values, are introduced in August.

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2006 September - Riot police disrupt a planned demonstration against the

government'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 presidential

polls from 2008 to 2010, effectively extending Mr Mugabe's rule by two years.

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

2007 March - Opposition leader Morgan Tsvangirai is hospitalised after his

arrest 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 electricity
is diverted towards agriculture.

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

Elections crisis
2008 March - Presidential and parliamentary elections. Opposition MDC
claims 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 pulled
out 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 cholera

epidemic and the collapse of its health care system.

2009 January - Government allows use of foreign currencies to try stem

hyperinflation.

2009 February - Tsvangirai is sworn in as prime minister, after protracted

talks 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 remains

frustrated 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 of

targeted sanctions, saying the unity government's progress should be rewarded. Zimbabwe's High Court rejects a regional court ruling against President Mugabe's land-reform programme.

2010 March - New rule forces foreign-owned businesses to sell majority

stake to locals.

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

2010 August - Zimbabwe resumes official diamond sales, amid controversy

over reported rights abuses at the Marange diamond fields.

2010 September - Premier Tsvangirai alleges ruling party instigating violence

at public consultations on new constitution.

2010 December - Ruling Zanu-PF party nominates President Mugabe as

candidate for next presidential race. Mugabe's wife Grace takes legal action over claims released by WikiLeaks that she profited from illegal diamond trading.

2011 February - 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. Rights groups report rise in violence against opposition supporters.

2011 March - Prime Minister Tsvangirai says unity government rendered

impotent 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 senior
politicians, 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's Marange fields.

2011 December - President Mugabe tells his Zanu-PF party conference that
he'll run in the next elections. He condemns the current power-sharing government as a monster.

2012 February - European Union lifts sanctions on some prominent

Zimbabweans, 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, agrees
in 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 complaining
that its rallies have repeatedly been shut down.

2012 May - UN human rights commissioner Navi Pillay calls on the West to lift
sanctions 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 in transactions 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 per US$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 monthon-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 Nations Development 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

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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 source of 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 locallyended 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

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