Zimbabwe Tinut

A PROJECT REPORT ON

Zimbabwe Rate of Inflation Submitted to

Submitted by

Dr. Shikha Oza

Ashini Mody (08BS0001751) Sec-B

In fulfillment for the project given to us in

MACRO ECONOMICS

IBS –Pune ICFAI University

Acknowledgement I express my deepest and most sincere thanks to Dr. Shikha Oza for giving me this opportunity. The project could not be complete without her support and guidance. Thanking her is a small gesture for the generosity shown.

A project report is the result of pooling of several ideas, suggestions and contributions involving several minds, rather than an individual work. So it is incomplete without the mention of names of those people who made it possible.

I express my gratitude to Dr. Shikha Oza for helping me and providing use with useful information. Interacting with her I learnt few tricks of professional management and I am sure the knowledge imparted will go in along way in enriching my career.

Abstract

Inflation breaks all the records in Zimbabwe. But it's a wonder how at this inflation-level, its economy is still surviving, the country has observed election and Robert Mugabe has lost. Inflation in Zimbabwe has broken all the records and is first such country of the list where inflation has reached to an uncountable percentage. Name of Zimbabwe will probably appear in the Guinness Book of World Records. In Nov, 2008 the rate of inflation is 89,700,000,000,000,000,000,000%. We have to say thanks to the Country’s Central Bank (CCB) and the people who are involved in inflation calculation. Our focus of this project is to study the impact of inflation on political, social life of Zimbabwe.

INFLATION

An increase in the general level of prices in an economy that is sustained over a period of time is called inflation. The emphasis on the ‘general price level’ which is ‘sustained over a period’. Inflation is measured for a basket of goods and services. Within the basket, prices of some of the goods and services may rise and prices of some of the goods and services may fall. When the overall price of the defined basket increases, it is called inflation. Some people believe that money growth and inflation go hand in hand. While money growth is very important in explaining inflation. •

A sustained increase in the growth rate of money will be there in the long run when all adjustments have taken place. In the long run, the inflation rate is equal to the growth rate of money adjusted for trend growth in real income.

•

A sustained increase in money growth will have no long-run effects on the level of output.

Although any increase in the price level is usually called an inflation, we need to distinguish between the forces that cause a once and for all increase in the price level and those that cause a continuing or sustained and increase. Any event that tends to drive the price level upwards is called an inflationary shock. Also, inflation and unemployment are closely related, at least in the short term. Inflation is generally considered to be undesirable, especially when it is unexpected because it distorts the signals that are provided by the price system.

HYPERINFLATION Although there is no precise definition of the rate of inflation that deserves the star ranking of hyperinflation rather than “high inflation,” a working definition is that a country is in hyperinflation when its annual inflation rate reaches 1000 percent per annum. In a hyperinflationary economy, inflation is so pervasive and such a problem that it completely dominates daily economic life. People spend significant amounts of resources minimizing the inflationary damage. They have to shop often so as to get to the stores before the prices go up. Their main concern in saving and investing is how to protect themselves against inflation. For this they reduce holdings of real balances to a remarkable extent to avoid the inflation tax but have to compensate by going to the bank more often daily or hourly instead of weekly. It seems difficult to believe that countries can function for any length of time with inflation rates of several hundred percent or more. In fact, they do not function well, and sooner or later they will stabilize a high inflation simply because the economy turns chaotic. Such high inflations are frequently associated with high deficits. But there is a two-way interaction between budget deficits and inflation. Large budget deficits can lead to rapid inflation by causing governments to print money to finance the deficit. In turn, high inflation increases the measured deficit. There are two mechanisms through which inflation increases budget deficits: tax collection effects and increases in nominal payments on the national debt.

Introduction: Zimbabwe was formed in 1978 when south and north Rhodesia was united to form republic of Zimbabwe. Robert Mugabe was elected as its first president and he is been ruling the land for last 28 years. His stay in the power for such a long time has proved to be futile. After Independence (1980) Zimbabwe quickly paced towards the path of development. She was considered to Be the most strongest & fastest growing economy in Africa. The source of Zimbabwe's hyperinflation is the Reserve Bank of Zimbabwe's money machine. The government spends, and the RBZ finances the spending by printing money. The RBZ has no ability in practice to resist the government's demands for cash. Accordingly, the RBZ cannot hope to regain credibility any time soon. To stop hyperinflation, Zimbabwe needs to immediately adopt a different monetary system.

She stood as an outstanding example for Other African nation When she received recognitions From UNO & West for its Excellent governance and trade policies . But her success only seemed to be a “flash in the pan”. In 1997 Things started going wrong. And since then

Fortune

Never Smiled On Zimbabwe…… And from then

Zimbabwe’s Lost her prosperity, and grip in the hands of evil (INFLATION).

HOW BAD IS INFLATION IN ZIMBABWE?

“If you need something and have cash, you buy it. If you have cash you spend it today, because tomorrow it’s going to be worth 5% less.” Well consider this: at a supermarket near the center of the capital, toilet paper costs $417. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750- an American currency about 69 cents. The price of toilet paper like everything else here soars almost daily. But what is happening is not a joke. For end numbers of Zimbabweans, toilet paper and bread, margarine, meat, even morning cup of tea have become unimaginable luxuries. All are causalities of the hyperinflation that is roaring toward 1000 percent a year a rate usually seen only in war zones. Zimbabwe has been tormented their entire decade by both deep recession and high inflation but in recent months the economy seems to have abandoned whatever moorings it had left. The national budget has already been largely spent. Government services have started to crumble. Zimbabwe’s inflation is hardly history’s worst. Public-school fees and other ever-rising government sub charges have begun to exceed the monthly incomes of many urban families lucky enough to find work. At the same time, Mr. Mugabe’s government has printed trillions of new Zimbabwean dollars to keep their ministries functioning and to shield the salaries of key supporters and potential enemies against further erosion. This had worsen inflation for printing too many worthless dollars is in part what got Zimbabwe into this mess to begin with. Zimbabwe fell into hyperinflation after the government began seizing commercial farms in about 2000. Foreign investors fled, manufacturing ground to a halt, good and foreign currency needed to buy imports fell into short supply and prices shot up.

ZIMBABWE – TURMOIL DEEPENS

Zimbabwe is characterized these days as Political stalemate, uncontrollable inflation, cholera “genocide” and Robert Mugabe. Once listed among Africa’s richest countries is now struggling to control its inflation rate running into millions. The political stalemate in the country deepened when President Robert Mugabe refused to accept the victory of Movement for Democratic Change leader Morgan Tsvangirai in March’s presidential Election. Meanwhile, the Mugabe government continued its crackdown on the opposition. In this election Tsvangirai was elected by 47.9% votes as against Mugabe 43.2% votes. But as Tsvangirai withdrew Mugabe came into the power by 85% of the votes. Meanwhile, domestic reconciliation efforts were short lived as the power sharing deal brokered between Mugabe and Tsvangirai pushed the country into chaos. The political problems in Zimbabwe failed to curb economic and health distress.

Economic shocks of Zimbabwe-It’s easy to become a billionaire This South African country is on the verge of collapse with its economy, public health and food facing the worst crisis which one could ever imagine. Zimbabwe is experiencing a major currency shortage, which has led to hyperinflation and the current inflation rate is staggering 231% million. The prices are doubling on a daily basis and 200,000 Zimbabwe Dollar is used to buy a loaf of bread. Due to this crisis, the Reserve Bank of Zimbabwe has launched a 200 million dollar note which is worth just 28 US$. As on 6-Dec-08, value of 1 Indian Rupee= 2196 Zimbabwe Dollar.

CURRENT CRISIS FACE BY ZIMBABWE

Zimbabwe is now suffering from crisis. Crisis of Economic, Social and Humanitarian. •

The Economic crisis includes: i.

Acute shortage of foreign currency with all its obvious repercussions

ii.

Critical shortage of fuel, which permeates the entire economy.

iii.

Shortage of basic commodities such as food, drugs, sanitary ware, etc.

iv.

Galloping inflation hovering around 86.7 sextillions [

v.

percent].

Limited supplies of electricity leading to constant power cuts which cripple agriculture, industry and commerce.

vi.

Shortage of water treatment chemicals.

vii.

Runaway budget deficit.

viii.

Very high interest rates which are ironically far below the inflation rate.

ix.

Official exchange rate competing with the parallel market rate which fuels inflation.

x.

Acute shortage of cash in banks and in circulation, crippling economic activity.

•

The Social crisis includes: i.

Unprecedented unemployment rate of around 90 percent.

ii.

Collapse of the health delivery system caused by shortage of drugs, obsolescence of equipment and flight of health personnel.

iii.

Instability of the education system resulting from humiliation and intimidation of teachers, strikes, shortage of food at boarding schools and tertiary institutions etc.

iv.

Virtual collapse of the transport system, unaffordability of the bus fares, shortage of fuel and spares.

v.

The culture of impunity and lawlessness.

vi.

•

Living standard of people fell up to 38%.

The Humanitarian crisis manifests itself in mass starvation and internal refugees from both urban and rural areas who run away from intimidation, torture, rape, retribution etc. Mass starvation was caused by the violent and chaotic land grabbing programme and the deliberate denial of food to perceived opposition supporters.

•

The Political crisis stems from the rigged 2002 presidential election. By stealing victory, ZANU PF leader Mr. Robert Mugabe became the illegitimate head of state. For the opposition MDC, the solution is holding fresh presidential elections which it hopes to win. MDC victory will, according to the opposition party, give it the Constitutional right to govern.

FACTS ABOUT ZIMBABWE

•

Zimbabwe is the first country in the 21st century to hyper inflates. In February 2007, Zimbabwe’s inflation rate topped 50% per month, the minimum rate required to qualify as a hyperinflation (50% per month is equal to a 12,875% per year). Since then, inflation has soared.

•

Zimbabwe is facing a super RUNAWAY inflation i.e. 86.7 sextillions [ percent].

•

In Zimbabwe the people have stopped the transaction in currency, in Zimbabwe the barter system is running .that means the Zimbabwean dollar lost 99.97% of its value. And that leads to create barter system.

•

In Zimbabwe the prices of the products are getting double in every 1.3 days .It means suppose if the price of an article is Zimbabwe$100 today it gets Z $200 dollar after 1.3 days.

•

The supermarket in Zimbabwe already stopped the transaction in Zimbabwean dollar, they accepts only South Africans RAND and US DOLLAR.

•

The rates that are running in the Zimbabwe are:(1)Overnight 10,000% (2)TN 91Days 66.33%

•

The data under shows the inflation rate in Zimbabwe from January 2007 to November 2008.

•

Hyperinflation have droves the one we were dealing with look like a walk in the park i.e. created a financial crisis. The latest figures put Zimbabwe’s annual inflation rate at 516 quintillion percent i.e 516 followed by 18 zeros.

•

Zimbabwe’s inflation crisis is now the 2nd worst inflation spike in history, behind the hyperinflationary crisis of Hungary in 1946, in which prices doubled every 156 hours. In September 2007, the exchange rate between the U.S. dollar and the Zimbabwe Dollar was USD1 and ZWD253. The current exchange rate between

the U.S.dollar and the Zimbabwe dollar is USD1 to ZWD60,623. This is a 23,861% increase since then.

Hanke Hyperinflation Index for Zimbabwe (HHIZ) Date

Monthly Inflation Rate

Index

Annual Inflation Rate

5-Jan-07

1.00

13.70%

2-Feb-07

1.78

77.60%

2-Mar-07

3.14

76.70%

5-Apr-07

6.90

56.20%

4-May-07

6.75

-2.15%

1-Jun-07

20.70

207.00%

6-Jul-07

53.00

60.40%

3-Aug-07

49.10

-7.29%

7-Sep-07

82.50

70.60%

5-Oct-07

219.00

165.00%

2-Nov-07

642.00

193.00%

28-Dec-07

2,010.00

61.50%

25-Jan-08

2,250.00

11.80%

29-Feb-08

8,260.00

259.00%

28-Mar-08

17,700.00

115.00%

25-Apr-08

57,100.00

222.00%

30-May-08

442,000.00

498.00%

26-Jun-08

23,600,000.00

5,250.00%

41,400,000%

4-Jul-08

49,200,000.00

3,740.00%

93,000,000%

11-Jul-08

81,800,000.00

2,080.00%

167,000,000%

215,000%

•

•

18-Jul-08

122,000,000.00

1,030.00%

250,000,000%

25-Jul-08

157,000,000.00

566.00%

317,000,000%

29-Aug-08

6,330,000,000.00

3,190.00%

9,690,000,000%

26-Sep-08

794,000,000,000.00

12,400.00%

471,000,000,000%

3-Oct-08

3,570,000,000,000.00

15,400.00%

1,630,000,000,000%

10-Oct-08

32,300,000,000,000.00

45,900.00%

11,600,000,000,000%

17-Oct-08

1,070,000,000,000,000.00

493,000.00%

300,000,000,000,000%

24-Oct-08

124,000,000,000,000,000.00 15,600,000.00%

26,100,000,000,000,000%

31-Oct-08

24,600,000,000,000,000,000. 00

7-Nov-08

4,890,000,000,000,000,000,0 15,200,000,000. 593,000,000,000,000,000,00 00.00 00% 0%

14-Nov08

690,000,000.00 %

3,840,000,000,000,000,000 %

853,000,000,000,000,000,000 79,600,000,000. 89,700,000,000,000,000,000 ,000.00 00% ,000%

Sources: Imara Asset Management Zimbabwe and author’s calculations.

SUPPLY SHOCKS

It is generally assumed that movements in output and prices in the economy were caused by shifts in the aggregate demand curve by changes in monetary and fiscal policy and investment demand. But the macroeconomic story was largely story of negative supply shocks.

A supply shock is a disturbance to the economy whose first impact is a shift in the aggregate supply curve.

Rational expectations theory argues that the aggregate supply curve should shift very quickly in response to anticipated changes in aggregate demand, so output should change relatively little. The theory of aggregate supply is not yet settled. Several explanations have been offered for the basic fact that labor market does not adjust quickly to shifts in aggregate demand: the imperfect information market clearing approach, coordination problems, efficiency wages and costs of price changes and contracts and long term relationships between firms and workers. Materials prices along with wages are determinants of costs and prices. Changes in material prices are passed on as changes in prices and therefore as changes in real wages. Materials price changes have been an important source of aggregate supply shocks.

Supply shocks pose a difficult problem for macroeconomic policy. They can be accommodated through an expansionary aggregate demand policy with increased

prices but stable output. Alternatively, they can be offset through a deflationary aggregate demand policy with prices remaining stable but with lower output.

Type of inflation that is in Zimbabwe :( from Supply side)

We all know that INFLATION means when there is more money supply in the market that leads to increase the income of the consumer and that leads to high demand and this made the rise in price.

In recent era, the inflation in Zimbabwe is because of less of supply .now the question is that there is no money supply in the Zimbabwe, then then how demand has increased.

Zimbabwe has violated many rules and guidelines which were given by IMF, and World Bank .Zimbabwe has also misuse the fund that was funded by USA and

other countries. So there is no money supply in the economy, and country have dearth of resources to produce, but how inflation is rising? The answer is, the demand in Zimbabwe is stagnant but the supply has reduced, so this created a massive inflation in Zimbabwe.

DEMAN

SUPPL

D

Y 10 10 10 10

6 5 4 3

This graph shows that demand pulling the price up. So the Zimbabwe is suffering from this kind of unique inflation.

Reasons for such a high inflation rate

•

The source of Zimbabwe's hyperinflation is the Reserve Bank of Zimbabwe's money machine. The government spends, and the RBZ finances the spending by printing money. The RBZ has no ability in practice to resist the government's demands for cash. Accordingly, the RBZ cannot hope to regain credibility any time soon. To stop hyperinflation, Zimbabwe needs to immediately adopt a different monetary system.

•

The current crisis stems from crucial decisions taken by President Mugabe.

•

In 1997 in order to quell unrest he awarded large, unbudgeted, payments to veterans of the independence war.

•

His policy of farm acquisition without compensating their white owners alienated many in the international community, and the decision to send troops to the Democratic Republic of the Congo (DRC) is a severe financial drain.

•

President Robert Mugabe's campaign rhetoric about nationalizing the country's other big income-earner, the mining industry, caused some companies to threaten to pull out altogether and has had an unquantifiable effect in scaring off desperately needed inward foreign investment.

•

Lack of funding from Western world, IMF and World Bank.

•

Carelessly spend money by government, and Reserve Bank of Zimbabwe (RBZ) printing the money and supply that money in the market.

•

The source of Zimbabwe's hyperinflation is the Reserve Bank of Zimbabwe's money machine. The government spends, and the RBZ finances the spending by printing money.

•

The RBZ has no ability in practice to resist the government's demands for cash. Accordingly, the RBZ cannot hope to regain credibility any time soon. To stop hyperinflation, Zimbabwe needs to immediately adopt a different monetary system.

How the money supplies in hyperinflation effect the economy??

There was an opinion that one way in which the problem of scarcity could be solved is by the pumping more money into the economy. In fact it would be very easy for government to print money and give some to every individual .However this would be a futile exercise since the problem is one of scarcity of goods and services and not of scarcity of money. Under condition of RUNAWAY inflation prices rise ten or hundred fold in a single month. Did such increase in the money supply solve the problem of scarcity? The answer is “No”. Most of the people become poorer during the time of RUNAWAY inflation ,because if government increase the money supply , then buying power of people gets increased and in the same way demand is also gets increase ,but the resources are limited so this again increase the prices and leads to serious inflation. Hyperinflation is a cradle-to-grave experience. The government announced that the the price of childbirth is $ 7 million and would rise to 463% by October 2008. Funeral would also cost double over the same period.

HUGE RISE IN ZIMBABWE INFLATION

Zimbabwe’s rate of inflation surged to 3,731.9% driven by higher energy and food costs and amplified by a drop in its currency. April’s inflation rate jumped to 2200% recorded. The analysts claim that four out of five Zimbabweans live below the bread line. The announcement came after Zimbabwe’s government created a commission charged with finding a way to curb the country’s spiraling cost of living. Due to this, there is high unemployment and shortage of fuel and food across the nation.

Price increases to ‘worsen’ The surging cost of domestic electricity, food, fuel and commuter transport fares were at the heart of price surges. Economists believe that these price increased would continue because Zimbabwe will be forced to import maize, a basic food staple should make up for a lack of home-grown produce. The government has also recently warned of shortages of bread and flour which caused more hardship.

Economic crisis

Rampant inflation is a clear sign of a deep economic crisis. Critics have blamed President Robert Mugabe’s policies particularly the seizure of white-owned farms for damaging the once self sufficient country was described as the bread basket of Africa. President Mugabe, has accused foreign governments of trying to sabotage Zimbabwe’s economy and topple him.

Recommended solutions

•

“Dollarization" — replacing the discredited Zimbabwe dollar with a foreign currency, such as the US dollar or the rand.

•

The second is a currency board. Under such a system, the Zimbabwe dollar would be credible because it would be fully backed by a foreign reserve currency and would be freely convertible into the reserve currency at a fixed rate on demand.

•

Free banking — allowing commercial banks to issue their own private notes and other liabilities with minimum government regulation. Any one of these systems, or a combination of them, could be implemented immediately, without preconditions, and would therefore quickly put an end to hyperinflation and produce stable money. •

The government needs to add another currency, like US$, as legal tender. If you were a shopkeeper in Zimbabwe, or a farmer across the border thinking about exporting goods to relieve the chronic shortages, would you really accept payment in Z$ that will be worthless before you get to the bank? The external currency as legal tender will help ease people's pain while the Z$ stabilizes.

•

In a country run by a brutal dictator, it is tough to make policy changes that diminish the power of the government and empower the free market. The solution is really for Mugabe to be removed from power.

•

Harborne reiterated the importance of "a political breakthrough" and outlined steps that could be taken to encourage meaningful economic reform in Zimbabwe. These include designing a clearance mechanism to address the massive debt amassed by the Mugabe regime, developing

a

comprehensive

strategy

and

mobilizing

resources to help finance reform and provide social safety nets

external

CONCLUSION

Mr.Robertson, the economist says that is unlikely, Zimbabweans can and probably will endure greater hardship, he says. As a whole, the nation has only now sunk to standards common elsewhere in Africa. But the governments have reached its limit. Cutting spending seems impossible and raising taxes further is unthinkable. Much more inflation is going to be printing its way out of its current difficulty.