Zimbabwe_Group7_Eco

8/7/2019 Zimbabwe_Group7_Eco

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E n v i r o n m e n t a l E c o n o m i cP o l i c y 2

Group 7Amit Matani 10P066Lokesh Harnal 10P086Mukund Murali 10P091Prateek Maheshwari 10P096Richa Gupta 10P105Sethu Ramalingam M 10P108

ZIMBABWE &

HYPERINFLATION


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ContentsINTRODUCTION ................................ ................................ ................................ ................................ . 3

Hype

f

: ................................ ................................ ................................ ................................ .. 3

Hype

f

in Zimbabw e: ................................ ................................ ................................ .............. 3

Time ine of Zimbabw e: ................................ ................................ ................................ ...................... 5

Land R ef orm s po s

2000: ................................ ................................ ................................ ................... 7

Wh eat produ ction :................................ ................................ ................................ ......................... 7

Toba cco Indu stry : ................................ ................................ ................................ .......................... 8

Manu f acturing sec tor : ................................ ................................ ................................ ................... 9

The effec t on GDP :................................ ................................ ................................ ........................... 10

The Probl em o f un employm ent : ................................ ................................ ................................ ...... 10

Governm ent D ebt :................................ ................................ ................................ ........................... 11

Cau ses of Governm ent expenditur e:................................ ................................ ................................ 11

Theori es of inf lation :................................ ................................ ................................ ........................ 12Cost-pu sh th eory : ................................ ................................ ................................ ........................ 12

Demand-Pull Th eory : ................................ ................................ ................................ ................... 13

Dollarization : ................................ ................................ ................................ ................................ ... 13

Uno ff icial Dollarization :................................ ................................ ................................ ................ 13

Semi-o ff icial Dollarization : ................................ ................................ ................................ ........... 14

Off icial Dollarization : ................................ ................................ ................................ ................... 14

Multi curr ency system : ................................ ................................ ................................ ..................... 14

Benef its ................................ ................................ ................................ ................................ ....... 14

Challeng es ................................ ................................ ................................ ................................ ... 14 Conclusion- Th e Road Ah ead : ................................ ................................ ................................ .......... 16

Refe rences ................................ ................................ ................................ ................................ ....... 17


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INTRODU CTION

Hyperinflation:

Hyperin f lation i s inf lation that i s very high or "out o f control". Whil e th e real valu es of th e specif ic economi c items generally stay th e sam e in t erm s of relativ ely stabl e f or eign curr encies, inhyp erin f lationary condition s th e general pri ce level within a specif ic economy in creases rapidly a s th e f un ctional or int ernal curr ency, as oppo sed to a f or eign curr ency and lo ses its real valu e veryqui c ly, normally at an a ccelerating rat e. It o ccur s wh en th ere is a larg e increase in th e mon ey supplynot support ed by gro ss dom es tic produ ct (GDP) growth , resulting in an imbalan ce in th e supply anddemand f or th e mon ey. Lef t un chec ed, hyp erin f lation cau ses pri ces to in crease, as th e curr encyloses its valu e.

Hyperinflation in Zimbabwe:

The hallmark o f Zimbabw e s economi c collap se is hyp erin f lation. Th e mo st r ece nt o ff icialinf lation f igur e is f or February 2 008: a whopping 165,000 percent y ear-ov er-year. In early Jun e 2008, inf lation i s uno ff icially about 2. 5 million p ercent a y ear. Not surpri singly , th e Zimbabw e dollar ha s lost mor e than 99 .9 percent o f its valu e again st th e U.S. dollar during th e pa st year. Zimbabw e s hyp erin f lation d es troy ed th e economy , pu shing mor e of its inhabitant s into pov erty , and f or cingmillion s of Zimbabw ean s to emigrat e . It ha s robb ed p eopl e of th eir saving s and f inan cial in stitution s of th eir capital through r eal (in f lation-adju sted) int eres t rat es that ar e actually n egativ e. Betw ee n199 7 and 2 007, cumulativ e inf lation wa s nearly 3. 8 billion p ercent , whil e living standard s fell by 3 8 percent. Th e sour ce of Zimbabw e s hyp erin f lation i s th e Rese rve Bank o f Zimbabw e s mon eyma chin e . The gov ernm ent spend s, and th e RBZf inan ces th e spending by printing mon ey.


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T imeline of Zimbabwe:

In th e year 2000 , Mugab e s support ers invad e and se ize whit e-own ed comm ercial f arm s, saying th e land wa s illegally tak en by whit e se ttl ers. The War v eteran s were th e support ers of Mugab e. The Governm ent o f Mugab e did not a sse nt to th e Mugab e s plan to r edistribut e whit e-own ed f arm s to bla cks. So th e war v eteran s f or cibly did it.

In th e year 2001 , Zimbabw e suffers f ood shortag es that gov ernm ent criti cs blam e on f armse izur es . But Mugab e blam es drought and Several W es tern gov ernm ent s qui e tly withdraw economi c aid ov er right s abu ses by th e gov ernm ent and Mugab e's land poli cy.

In 2002 , Collap se of comm ercial agri cultur e and poor w eath er contribut e to se riou s f oodshortag es, leaving about hal f of Zimbabw e's population in n ee d o f emerg ency f ood aid. Th e collap se of comm ercial agri cultur e happ ened b ecau se of th e ineff iciency of th e bla ck f arm ers as th ey couldn t

produ ce quality crop s f or export s.

In 2003 , Hundr eds of compani es ar e f or ced to shut down du e to economi c hard ship s andrising in f lation. Thi s compl ete ly led to th e economi c down f all o f Zimbabw e and th e country couldn trecover f rom thi s loss. Thu s hyp erin f lation start ed to play it s part in th e Zimbabw ean economy a s th e nation had to print mon ey to sustain it s economy.

In 2004 , a system o f au ctioning scar ce f or eign curr ency f or import ers wa s introdu ced , whi chtemporarily l ed to a slight r edu ction in th e f or eign curr ency crisis.

Curr ency wa s devalu ed by th e central bank twi ce, f irst to 9,000 to th e US$, and th en to17,500 to th e US$ on 2 0 July 2005 , but at that dat e it wa s report ed that that wa s only hal f th e rat e availabl e on th e bla ck mark et.

In 2 006, th e governm ent had print ed ZWD 2 1 trillion in ord er to buy f or eign curr ency to payoff IMF arr ear s. In early May 2 006, Zimbabw e's governm ent b egan printing mon ey again to produ ce about 60 trillion Zimbabw ean dollar s. Exchang e rat e had b ee n f roz en at Z $101,196 per U.S. dollarsince early 2006 , but a s of 27 July 2 006 th e parall el (bla ck mark et) rat e ha s reached Z$550,000 perU.S. Dollar. In Augu st 2 006, th e Zimbabw ean gov ernm ent i ssued n ew curr ency and a sked citizens to

turn in old not es; th e new curr ency (issued by th e central bank o f Zimbabw e) had thr ee zero es slashed f rom it.

On 1 April 2007 th e parall el mark e t wa s asking ZWD 3 0,000 f or $1 USD.[28] By year end , itwa s down to about ZWD 2 ,000,000 . In Mar ch 2 007, inf lation surg ed to a n ew high o f 1,73 0%, and inJun e th e governm ent r elease d a f igur e of 7,638%. The gov ernm ent th en circulat ed a Z $200,000 not e


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and r eport s of extr em e shortag es of ba sic f ood stu ffs, f uel, and m edical suppli es abound ed. Th e gov ernm ent in stitut ed a six-month f ree ze on wag es on Sept emb er 1, 2007.

The Rese rve Bank o f Zimbabw e issued a ZWD 10,000,000 not e in January 2 008, roughlyequival ent o f 4 US dollar s. In April 2 008 th e Rese rve Bank o f Zimbabw e issued a ZWD 50,000,000

not e, whi ch wa s th en worth appro ximat ely 1.20 US dollar s. On 3 0 July 2008 , th e Governor o f th e RBZ, Gideon Gono announ ced that th e Zimbabw e dollar would b e redenominat ed by r emoving 10 zero es, with effec t f rom 1 Augu st 2 008 . ZWD10billion b ecam e 1 dollar a f ter th e redenomination. OnDece mb er 6, 2008, th e Rese rve Bank o f Zimbabw e announ ced plan s to circulat e th e ZWD200,000,000 not e, just day s af ter introdu cing th e ZWD 100,000,000 not e .

In lat e Dece mb er 2 008 and early January 2 009, th e use of f or eign curr ency a s a commonmedium o f exchang e becam e increasingly popular. On 12 January 2 009, Zimbabw e introdu ced th e ZWD 50,000,000,000 not e. On F ebruary 2 , 2009 a f inal d enomination wa s impl ement ed , cutting 12zero es, bef or e th e Zimbabw e dollar wa s off icially abandon ed on April 12, 2009.


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L and R eforms post 2000:

Land R ef orm s were institut ed by Rob ert Mugab e to r edistribut e th e land b etw ee n bla cks and whit es . Whit e f arm ers had a chieved economi es of scale with th eir advan ced t echnology andknowl edg e. The produ ction by th e whit e f arm ers wa s used f or th e export s. The bla ck f arm er did notpo ssess titl e dee ds of th e f arm land. Th e bla ck f arm er had l esse r experience in running a f arm. Th eylacked th e ad equat e knowl edge and t echnology to produ ce good yi elds. Con sequ ently f arm outputtook a se riou s hit a s bank s did not agr ee to f inan ce bla ck f arm ers du e to la ck o f experti se. The produ ction o f th e bla cks wa s enough only to support th e int ernal or lo cal n ee ds and not goodenough f or th e export s. Lat er a f ter som e tim e, th e yield wa s not suff icient even f or th e local n ee ds resulting in a cut e f ood shortag es whi ch Mugab e called Drought .

Wheat production:The wh eat i s th e major crop o f Zimbabw e. Th e produ ction o f thi s crop whi ch a ccount ed f or

mo st o f Zimbabw e s export s wa s affec ted b ecau se of th e land r ef orm s. The annual produ ction o f wh eat wa s mor e than 3 00,000 ton s in 1990 and it plumm eted to l ess than 50,000 po st land r ef orm

in 2 000 .


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T obacco I ndustry:Toba cco is th e Zimbabw e s singl e larg es t g enerator o f f or eign exchang e. It a ccount ed f or

almo st a third o f Zimbabw e s f or eign exchang e earning s in 2 000. The crop that earn ed som e US$600 million in 2 000 generat ed less than U S$125 million in 2 007. Thi s wa s th e effec t o f th e land b eingdistribut ed to th e locals.


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M anufacturing sector:Manu f acturing indu stry al so f aced som e adv erse effec t po st 2 000 . manu f a cturing sec tor ha s

shrunk by mor e than 47 p ercent b etw ee n 1998 and 2 006, whi ch carri ed output l evels ba ck to f igur es record ed in 1972. Th ere were som e poli cies whi ch w ere f ormulat ed f or th e manu f acturing sec tor.The law r equir es export ers to se ll up to 3 0 percent o f th eir f or eign exchang e earning s to Zimbabw e s Rese rve Bank at an arti f icial exchang e rat e that i s a f ra ction o f th e real mark et rat e. M emb ers of th e ruling r egime and th eir a ssociat es hav e becom e rich by buying up f or eign curr ency at th e off icialexchang e rat e and th en se lling it at th e bla ck mark et rat e, po cketing th e difference. To stemrunaway in f lation , th e gov ernm ent announ ced halving all pri ces. Manu f acturing output fell by mor e than 50 percent. Many manu f acturing f irm s had to shut down b ecau se of thi s.


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T he effect on G DP :Gro ss dom es tic produ ct (GDP) d ec lined by about 43 p ercent b etw ee n 2 000 and 2 007.

T he P roblem of unemployment:Employm ent l evel hav e bee n sharply d ecreasing at a f ast pa ce since 1999 . Rising wag e rat es

cau sed employ ers to continuou sly increase salari es whi ch l ed to f urth er in f lation a s labour b ecam e expensive.


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Government D ebt:The Gov ernm ent d ebt wa s increasing rapidly. Govt could not pay ba ck IMF loan s and th e

debt s f rom th e oth er countri es. RBZ raise d mon ey f rom th e int ernal economy , whi ch led to anincrease in th e int eres t rat es thu s f ue lling in f lation.

Causes of Government expenditure:The gov ernm ent ha s run hug e budg et d ef icits. The budg e t d ef icit wa s as high a s 22 % of GDP

in 2 000 . To r ecover f rom th e def icit probl em , th e Governm ent print ed mon ey to cover th e gap s.The Governm ent expenditur e increase d y ear by y ear.

y In 199 7 th ere wa s an unbudg e ted gov ernm ent expenditur e of 199 7 to pay th e war v eteran s gratuiti es . The war v eteran s ar e th e support ers of Mugabw e.

y Zimbabw e sint ervention in th e Demo crati c Republi c of Congo (DRC) swar in 1998 y The expenses of th e controv ersial land r ef orm (b eginning 2 000 )y The parliam entary (2 000/ 2005) and pr es idential (2 002) election s y Introdu ction o f senator s in 2 005 (at l east 66 po sts) as part o f widening th e think tank ba se


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Theo ri es of i f l

ion:T here are various theories to e plain the in

lation.

C ost- pu sh theo r :T he cost -push theor y underscores the

act that prices rise due to increasing cost o

the

actors o

production. This theor y maintains that prices o

goods and ser vices rise because wages arepushed up b y trade unions

bargaining power or b y the pricing policies o

oligopolistic andmonopolistic

irms with market power. Thus labour market rigidities and changes in the cost o

labour are considered a ma jor cause o

in

lation in de veloped countries albeit not generall y considered a ma jor cause o

in

lation in most de veloping countries.

Zimbabwe

s situation since the new millennium has pro ved that wages are a

orce to reckonwith when anal y ing hyperin

lationar y trends. Whilst be

ore h yperin

lationar y started wages weregenerall y re viewed twice a year both in the go vernment and pri vate sectors the situation has sincechanged. E ven though up to now the public sector unshakabl y continued to re view its salaries asbe

ore the pri vate sector has since changed the re view process. In most pri vate companies since2000 salaries ha ve been re viewed quarterl y and upwardl y in line with in

lation trends

with someother pri vate companies re viewing them on monthl y bases. Another important

actor o

productioncosts

or the countr y has been imported raw materials. Gi ven the acute shortage o

oreign currenc y in the countr y since 2000 most imports ha ve been

inanced b y e pensi ve

oreign currenc y

rom theblack market thus resulting in higher output costs sur

acing in higher market

consumer prices.


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D emand- P ull T heory:This school o f thought po stulat es that in f lationary pr ess ur es ari se becau se of excess demand

f or good s and se rvices resulting f rom expan sionary mon etary and f iscal poli cies . Over and abov e th ese sugg es ted mon e tary expan sion and f iscal poli cies, th e Zimbabw ean situation ha s bee ncompound ed by shortag es of ba sic commoditi es (i.e., mealie-m eal (stapl e diet) , cooking oil , f lour , f uel, sugar , to m ention a few), thu s result in p ent-up upward pr ess ur e in th e overall pri ce.

D ollarization:The Dollarization can rapidly slash th e inf lation rat e and r es tor e stability and growth to th e

Zimbabw ean economy. Thi s option would r epla ce th e discredit ed Zimbabw e dollar with a f or eigncurr ency, such a s th e U.S. dollar or th e South A f rican rand. Dollarization o ccur s when r es ident s of country extensively use th e U.S. dollar or anoth er f or eign curr ency along side, or in stead o f, th e dom es tic curr ency. Th ere ar e thr ee typ es of Dollarization

y Uno ff icial Dollarizationy Semi-o ff icial Dollarizationy Off icial Dollarization

U nofficial D ollarization:Uno ff icial dollarization o ccur s wh en individual s hold f or eigncurr ency bank d epo sits

or not es (pap er mon ey) to prot ect again st high in f lation in th e dom es tic curr ency. Zimbabw e is alr eady uno ff icially dollariz ed to th e extent that Zimbabw ean s hold South A f rican rand , U.S. dollar s, pound s sterling , and oth er f or eign curr encies as stor es of valu e. It involv es holding o f f or eign bond s


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and oth er nonmon e tary a sse ts, f or eigncurr ency d epo sits (e ith er abroad or dom es tically), andf or eign not es.

S emi-official D ollarization:In thi s case, f or eign curr ency is legal t end er and may even dominat e bank d epo sits.

The f or eign curr ency play s a sec ondary rol e to dom es tic curr ency in paying wag es, ta xes, andeveryday expenses.

O fficial D ollarization:Off icial dollarization o ccur s, wh en a country u ses a f or eign curr ency a s th e main , or

only , compon ent o f th e mon etary ba se . The mon etary ba se is th e medium a ccept ed f or f inalse ttl em ent o f paym ent s in th e local f inan cial system ; in oth er word s, it is what bank s typi cally u se f orclearing. For eign curr ency (or curr encies ) ha s exclusive or pr edominant statu s as f ull legal t end er.Dom es tic curr ency is con f ined to a secondary rol e. It i s also called Full Dollarization.

M ulticurrency system:

The off icial r ecognition o f th e demise of th e Zimbabw e dollar took pla ce in F ebruary 2 009, wh en authoriti es es tabli shed a multi curr ency system. Und er thi s system , tran saction s in hard f or eigncurr encies ar e authoriz ed , paym ent s of ta xes ar e mandatory in f or eign exchang e, and th e exchang e system larg e ly is liberalized. Since th e abolition o f all surr end er r equir em ent s on f or eign exchang e pro cee ds on Mar ch 19, 2009, th ere ha s not b ee n a f un ctioning f or eign exchang e mark e t f orZimbabw e dollar s. Bank a ccount s denominat ed in Zimbabw e dollar s (equival ent to about U S$6 million at th e exchang e rat e of Z$35 quadrillion p er US$1) ar e dormant. U se of th e Zimbabw e dollaras dom es tic curr ency ha s bee n di scontinu ed until 2 012. Whil e f ive f or eign curr encies hav e bee ngrant ed o ff icial statu s, th e U.S. dollar ha s becom e th e prin cipal curr ency.

Benefits :

The multi curr ency system ha s provid ed signi f icant b enef its. In parti cular , it f ostered th e re-mon etization o f th e economy and f inan cial r e-int erm ediation , helped enf or ce f iscal di sciplin e by

pr ecluding in f lationary f inan cing o f th e budg et , and brought gr eat er tran spar ency in pri cing andaccounting a f ter a long p eriod o f high in f lation. A s a r esult , th e pri ce level in U. S. dollar s declinedduring 2 009, whil e th e economy start ed to r ecover.

Challenges :


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The multi curr ency system al so po ses a numb er o f chall enges . First , pri ces and wag es ar e usually agr ee d and quot ed in U. S. dollar s, whil e South A f rica is Zimbabw e smain trading partn er andcountry o f origin o f capital in f low s. Mov em ent s in th e U.S. dollar / rand exchang e rat e th eref or e hav e con siderabl e effec ts on Zimbabw e s comp e titiv eness and int ernational inv es tm ent po sition. Second , shortag es of small-d enomination U. S. dollar banknot es and coin s po se diff iculti es f or r e tail ers. Third ,

som e politi cian s hav e expr esse d con ce rn that lo ss of th e national curr ency and se igniorag e is anund es irabl e ero sion o f sovere ignty and mon etary ind epend ence .

The gov ernm ent con siders th e multi curr ency mon e tary r egim e a t emporary arrang em entuntil 2 012 at l east. D espit e th e remaining chall eng es (see abov e), th e multi curr ency regim e couldcontinu e to op erat e with ce rtain improv em ent s until a n ew r egim e is cho se n. Th e necess aryimprov ement s includ e aligning l egislation , including th e RBZ Act , with th e pr evailing pra ctice of use of multipl e curr encies, making exchang e control s mor e tran spar ent , and f acilitating th e supply o f coin s, po ssibly with an agr ee m ent with South A f rica.


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Conclusion- T he R oad Ahead:

1. T nsp nt t nsf of qua si-fis ! a l ac ti " iti s to th go " n # nt budge t, as announ ced byth e 2007 budg et. No entity out side th e budg e t should und ertak e any a ctivity o f a f iscalnatur e (including int eres t paym ent s, sub sidized credit s etc.) without o ffse tting tran sfers tran spar ently provid ed f or in th e budg e t. For in stan ce, any QFA s carri ed out through th e RBZ, FISCORP, th e Indu strial D eve lopm ent Bank o f Zimbabw e or any oth er publi c entityshould b e covered via budg e tary tran sfe rs. Th e purpo se of thi s step , whi ch by it se lf wouldnot r edu ce inf lation , is to in crease tran spar ency and a ccountability and str ength en f iscalgov ernan ce by having a ction s of a f iscal natur e subj ec ted to normal budg e tary scrutiny andpro cedur es .

2. Sub st anti a l fis ca l ti ght e nin g, includ ing th e new l$ -ab so % bed QFA s of th e RBZ o % a n $ oth erpub lic e ntit $ . For in stan ce, es timat es ba sed on pr eliminary data f or 2 006 sugg es t that aredu ction o f at l east 10 percentag e point s of GDP in th e adju sted primary balan ce (including th e newly-ab sorb ed QFA s) r elativ e to th e out com e in 2 006 would b e nee ded tolow er in f lation by about 800 percentag e point s. A tight ening o f thi s ord er o f magnitud e ormor e would b e in lin e with larg e f iscal adju stm ent s mad e by oth er countri es, as discusse dabov e .

3. Libera lizin g th e exc ha nge reg i & e by u nif ying th e exc ha nge ra t e a nd rem o ' ing re st rictions on curre nt int er na tion al payme nts and t ra nsf er s. The int erbank exchang e rat e would n ee dto b e sub stantially d evalu ed promptly and all multipl e exchang e rat es eliminat ed. Th e int erbank rat e should th en b e depr eciat ed steadily toward th e parall e l mark e t rat e (whi chwould appr eciat e as f iscal and mon e tary poli cies ar e tight ened) , and th e uni f ied exchang e rat e sub sequ ently f loat ed.

4. D eregu la tin g price s and im posin g a hard budge t const ra int on pub lic e nt er prise s.Ent erpri ses nee d a hard budg et con straint that r equir es th em to cut costs and op erat e atpr ese t l evels of budg e t sub sidies and agr ee d pri cing f ormula s. Deregulating pri ces andallowing publi c ent erpri ses to introdu ce cost-r ecovery pri cing would b e an esse ntialelem ent o f a plan to mov e th e op eration o f th ese ent e rpri ses to a comm ercial f ooting. Pri ce deregulation would lik ely lead to a on e-off spike in pri ces, but strong f iscal adju stm ent

would ultimat ely redu ce inf lation pr ess ur es .

5. Est ab lishin g a st ron g m on ey a ncho r to reduce infl a tion a nd infl a tion ex pec t a tions . On ce exchang e rat es ar e uni f ied and th e RBZ disengag es f rom QFA s, a broad mon ey an chor and af lexible exchang e regim e could b e es tabli shed , with r ese rve mon ey a s th e op erationaltarg et. (An exchang e rat e an chor would b e diff icult to impl ement b ecau se int ernational

rese rves ar e low). To ensur e that mon e tary poli cy is effec tive and r edu ce liquidity ri sks inth e banking system , int eres t rat es would n ee d to b e gradually mov ed to mark etdetermin ed levels.


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R eferences :

http :// www. cato.org / pub s/ dpa / dpa 6.pd f

http :// www.im f .org /ex ternal / pub s/f t / wp / 2007/ wp 0799 .pd f

http :// www.im f .org /ex ternal / pub s/f t / dp / 2010/ af r100 3.pd f

http :// web.up.a c.za /Use rFiles/ WP_2 007_ 10 .pd f

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