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Inflation in Zim

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By Emmanuel Tinashe Matsekete
Genius Mbambu
Lilion Gwatipedza
Introduction
• Dictionary definition of :
• Inflation – a sustained increase in an economy’s price level
• Hyperinflation – an exceptionally high rate of inflation, which may result in
people losing confidence in the currency.
• At the beginning of the 21st century Zimbabwe went through hyperinflation and it
all started in 1990s as a result of some political turmoil.
• Hyperinflation happens when the inflation rate exceeds 50% and gets out of
control resulting in loss of confidence and value in the currency.
• There are three causes of inflation in economics which are the cost-push
inflation, demand-pull inflation and the monetarist principle
• All these are as a result of factors e.g. confidence in currency, political tension
Causes
• In economics inflation is caused by cost-push inflation ,demand pull inflation and
the monetarist principle
• These are as a result of other factors , in the case of Zimbabwe the monetarist
view applies to a large extent :
Mainly because monetarists believe that inflation is caused by an excessive growth
in the money supply. And this could be as a result of the fact that the money has no
firm basis to give it value and that the people holding the money lack confidence in
its ability to retain its value. All this adds on to the overprinting of money.
• Overprinting started in the 1990s to finance a war in Congo and to increase
salaries of soldiers and government officials.
TM in 2008
Causes
• The hyperinflation in Zimbabwe was caused solely by the excessive growth of the
money supply.
• It was as a result of the Government printing money in response to :
 High National Debt
 Decline in economic output
 Decline in export earnings
 Price shortages which worsen shortages
 Lack of confidence in business, government and economy.
Millionaire food
Situations that led to hyperinflation
• In the late 1990s the government under the influence of army veterans made the
biggest mistake in all human history , and this mistake tore the economy apart for
current and future generations. They conducted a series of land reforms.
• This process involved redistributing land from the existing white farmers to black
farmers. But, with little experience, the new farmers struggled to produce food,
and there was a large fall in food production. This is what caused the decline in
economic output and export earnings as mention in the previous slide.
• The economy experienced a sharp fall in output (both agricultural and industrial),
and this caused a collapse in bank lending leading to the government printing
more to pacify those relying on government pay (civil servants) , only as a short
term scheme.
Situation at hand during hyperinflation
• With the economy in decline, government debt increased. To finance the higher
debt, the government responded by printing more money, which caused more
inflation. Inflation meant bondholders saw a fall in the value of their bonds and
so it was hard to sell future debt.
• There were several shortages of goods as a result and this meant that there was
too much money in excess of the products of available.
• As a result of the decline in output, there were shortages of goods, which pushed
prices up. Demand was rising because people had more paper money. This
combination of more money chasing fewer goods caused very rapid rises in
price. When there is a shortage prices rise. Combined with printing more money
and this shortage of actual goods, prices rose rapidly
Efforts to stop hyperinflation
• The government tried to control the prices , this only made the shortage of supply in Zimbabwe
worse.
• Price controls set the price for basic goods and this was aiming to make the prices affordable and
to stop inflation
• But due to the fact that the cost of production increased faster than prices, suppliers had little
incentive to supply the goods. This made the shortage worse and the actual inflation worse.
• Zimbabwe had inflation since the mid-1960s (due to economic sanctions applied in response to
UDI ,1965 ). The 2000s it then became hyperinflation and the situation became extreme.
(Inflation is normal but hyperinflation is critical). If people expect hyperinflation, they demand
higher wages and push up prices in anticipation of higher inflation in future. This is another
reason why the government printed more money.
• In 2007 inflation was declared illegal , anyone who raised the prices for goods and services was
subject to arrest but this resulted in price and was not effective in halting inflation
Effects of Hyperinflation
• People could not afford basic goods – Zimbabweans were “billionaires” during
inflation but were still poor at the same time because e.g. They earned 1 billion
but a loaf of bread cost 2 billion.
• No credit available – Due to rising prices , the value of debt could disappear at
any point in time , this meant business and individuals had no access to credit.
Normal business activity closed down and investment ceased.
• Menu costs - With inflation increasing at a fast rate everyday, anyone who
received money had to exchange into foreign currency or spend straight away.
Bus fares were one price in the morning, and much more expensive on the way
back. People had to spend time adjusting prices, but more importantly get rid of
Zimbabwean currency as soon as you received it.
Effects
• Switch to a barter economy - With money becoming losing value fast, people
found ways around the official economy, paying for goods in kind (e.g. using sadza
to get a haircut) The problem is the barter economy is only useful if you have
goods to exchange. Business increasingly switched to the use of foreign currency
– the US dollar as the only way to survive inflation. In 2009, this practice became
more widespread.
• Lost savings - Unless people were able to exchange with foreign currency, they
lost everything . Even people with assets and property often saw the value shrink.
Foreign exchange controls make it very hard to take money out of the country.
• Damage to business confidence - The extent of hyperinflation and fall in output
disrupted normal economic activity and saw Zimbabwe GDP shrink. It affects
investors for a long time. And in 2019 as we speak business confidence is at an all
time low ,leaving only those countries that exploit African countries.
Since there was nothing in the shops
Chimodho instead of bread
Ice lolo instead of ice cream
How did hyperinflation cease
• The only effective measure taken by Zimbabwe to halt inflation was to adopt a
multi-currency system which consisted of the South African Rand , The US dollar ,
the euro and the Pula .
• The US Dollar had the most credibility and was the most widely traded within
Zimbabwe
• This meant that suppliers could purchase their raw materials and capital from
outside and make profit from it within Zimbabwe.
• A change of government systems as a result of the Government of National Unity
which consisted of new and brilliant minds boosted political confidence which
meant foreign countries were keen to provide loans for Zimbabwe.
Substitutes as a result of the tough conditions
Nyatera ( shoes made of tyres)
Proper shoes