Case: Zimbabwe

descends into chaos

1

Zimbabwe Case  An interesting case on country risk  Experienced 7-digit inflation recently ( Monthly inflation : 80 billion %)  Population 13 million ( of whom 3 million immigrants) 2 .

) In 2008.Zimbabwe Case ( contd. 80% of population was below the poverty line (ZWD 13 Trillion/month (USD 41 ) Something like 317 billion ZWD per USD Unemployment International ( 94% at end 2008) isolation for many years 3 ..

Highest Inflation Rates in the world ever!! .

Question 1 What are the key elements of country risk in Zimbabwe? 5 .

Question 1 ( on key elements of country risk)  Fiscal imbalance  Monetary instability  Absence of property rights  Exchange and price controls  Pervasive corruption  Absence of basic institutions of government 6 .

Question 2 How has increased country risk affected economy and living standards? 7 .

Question 2 ( on the impact of govt policies on the economy)  Economy has nose-dived  Per capita income has plummeted  Galloping inflation  Acute shortage of basic necessities 8 .

overvalued relative to its black market rate? 9 . at its official rate.Question 3 By how much is Zimbabwe’s currency .

as follows: Currency overvaluation = Black market rate / official rate = 5500 / 824 = 6.Question 3 ( on currency overvaluation )  Zimbabwe’s currency overvalued by nearly seven times.67 times Question: What are the implications of an overvalued currency to the country’s economy? 10 .

. preempting essential imports ( lifesaving drugs. imports needed by export-oriented industries) 11 .) Likely impact of currency overvaluations:  Adverse impact on exports  Shortage of foreign exchange.Question 3 ( contd.

(1) (2) (3) (4) Erosion of currency value 12 . what would it look like? We keep currency erosion as the last box in the flow chart.Question 4  Suppose we attempted a diagnostic flow chart explaining the collapse of Zimbabwe’s currency.

Question 4 This is how the flow chart might look like: (1) Large Budget Deficits (2) Financed by printing more money (3) Galloping inflation (4) Erosion of currency value Couple of interesting questions on the next slide 13 .

Questions 1 How do common people survive in hyperinflationary conditions. What advice would you give them? Is there anything in the macro-economic toolkit that might help? 14 . such as Zimbabwe in the recent past? 2 A country experiencing hyperinflation seeks your advice on bringing inflation under control.

Geffry Sachs Currency Board Country’s money stock linked to its stock of foreign reserves See next slide for an update on Zimbabwe Free convertibility at a fixed rate of exchange to the anchor currency ( say the USD) Questions 1 What happens if central bank sells USD 20 billion from reserves? 2 Would you contemplate a similar system for India? 15 .

and South African Rand as legal tender  International organizations ( IMF. World Bank. Major trading partners : S.An Update on Zimbabwe There has been some improvement in the last three years  Power-sharing and political stability  Economy slowly getting on track (GDP $ 13. ( eg. Inflation down to 8% ) Exports $ 3. Imports $ 3. others) actively involved in helping the country turn-around  Foreign investment is beginning to come in. growth 4. Per capita $ 800.677 billion .4%. Essar Steel has plans to invest in steel and coal ( about $ 600 million ) 16 .66 billion.144 billion. Africa and China)  Use of Dollar.