An analysis of hyperinflation and Zimbabwe’s future prospects

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Introduction: The Zimbabwe hyperinflation crisis

Zimbabwe, once duly referred to as the “breadbasket of Africa,” experienced significantly high and persistent levels of inflation from March 2007 until August 2008. An economy in retreat, coupled with the rapid monetization of high levels of debt, precipitated the rapid decline in the value of the Zimbabwean dollar (ZWD). These factors, taken together, led to what many refer to as the “Zimbabwe hyperinflation crisis.” Notwithstanding, to resuscitate its ailing economy, the country had to forego its currency in exchange for the South African Rand and the Dollar, amongst others (Noko, 2011). Zimbabwe, a nation devoid of its own currency, along with widespread malfeasance, continues to deter its ever-expanding diaspora. Hitherto, the small, landlocked Southern-African state has become analogous with an economic malaise that continues to reverberate across economics and politics classes worldwide.

This article will elaborate on the country’s bout of hyperinflation by discussing various historical facts that precluded the crisis. This includes an analysis of the economic and political impact of the crisis by analyzing five separate economic indicators. Finally, it concludes by providing forecasts, potential next steps, and policies that should be implemented to ensure that Zimbabwe returns to economic and political prosperity.

Zimbabwe: A brief history

Zimbabwe is a small, landlocked country that consists of two main tribes; the Shona and the Ndebele. It has a neighbor in Mozambique to the east, Botswana to the west, South Africa to the south and Zambia to the north. That said, in the late 19th century, colonialist Cecil John Rhodes, arrived with a royal charter for his British Company South Africa (BCSA). The charter, obtained after fleecing the Ndebele King Lobengula, included mining concessions that spread across 390,757 square miles and included both the Matabele and Mashona’s land respectively (Meredith, 2007). These events precipitated a formal British colony and its white minority ruler predecessors, which effectively ruled until “Rhodesia” gained independence on the 18th of April 1980. Robert Mugabe, the former liberation struggle icon, and chosen president focused on educating a large swathe of Zimbabweans while simultaneously strengthening the country’s mining and agricultural sectors. Discernible domestic policy, high literacy rates, and a burgeoning economy gave the country the title of “the breadbasket of Africa” (Mbeki, 2009).

In the late 1990’s however, the economy started regressing. More specifically, in 1999 a severe drought severely impacted the Zimbabwean agricultural sector and by extension its ability to export. The effect of the drought was perpetuated by aggressive redistribution and “illegal” occupation of approximately 4500 white-owned commercial farms in 2000 and 2001. Those as mentioned earlier were sanctioned to expedite historical redress for the increasingly frustrated indigenous majority (Makochekanwa, 2009). Although if done correctly, this is prudent domestic policy, the government failed to institutionalize the necessary support structures for its lands new owners. Ostensibly, the rationale for the redistribution of land was done to redress the country’s colonial past and white-minority economic domination. In reality, part of the underlying logic for the undermining of property rights was so that president Mugabe could retain power by isolating his urban detractors while simultaneously strengthening his rural base and the ZANUPF’s strongholds. It can further be described as an extension of a patronage network (Mbeki, 2009). Notwithstanding, land occupation and its associated policies depressed Zimbabwe’s commercial farming sector. Estimates show that between 2000 and 2009, total agricultural output fell by 50 percent. Deep-diving even further, the countries foreign earnings from export tobacco and commercial maize, declined by 64 and 76 percent respectively within the same period (Food and Agriculture Organization of the United Nations, 2011).

The decline in output coincided with a significant increase in government spending. For example, in 1997, the government approved unbudgeted expenditures and went further by participating in the 1998 Congo war. The before-mentioned involvement in the war resulted in the approval of the payment of bonuses to 60 000 war veterans. Therefore, an increase in Zimbabwe’s debt as a percent of GDP was inevitable given the expansion in spending coupled with the aforementioned sharp decline in agricultural output and tax collection respectively. The government, to fund the ever-increasing debt, began the process of debt monetization. Put differently; the central bank undertook the printing of ZWD as a means of paying its impending debts (Federal Reserve Bank of Dallas, 2011). It would be remiss to ignore the fact that these policies further tainted Zimbabwe’s image across the world. An article in The Guardian in 2002 highlighted that both the European Union and the United States issued trade sanctions and withheld aid. These actions only furthered the country’s escalating economic woes.

The rapid monetization of debt led to ever increasing inflation. The quantity theory money formula popularized by Irving Fisher (1911) can explain this. Succinctly put, in the short run, an increase in money supply, holding the velocity of money and output constant, leads to an appreciation in prices, ceteris paribus. This is reticent of what happened when in 2006, for example, the ZWD’s purchasing power eroded so much that in response, the central bank printed new bank notes at 1000th of its original value. Within the first five months of 2008, 1 million and 50 billion ZWD notes began to circulate respectively (Federal Reserve Bank of Dallas, 2011). According to data accessed from the World Bank’s database, inflation averaged 31 percent between 1990 and 2001, 388.27 percent between 2001 and 2007 and 26000 percent in 2008. Other research agencies would argue that the 26000 percent is an understated estimate of the actual inflation rate experienced in 2008. Notwithstanding, printing money and the erosion of its purchasing power became self-perpetuating mechanisms. So much so that prices doubled every 24.7 hours and at a daily rate of 98 percent (Hanke & Krus, 2012).

In 2008, the government had to respond and adopt a multicurrency system, which included the USD and the South African Rand, amongst others, to mitigate hyperinflation. An article in the Economic Times stated, “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”. Quintessentially, a currency that at its peak in 1980 valued at 1.54 per USD, became worthless and 30 years of economic progress decimated within ten years.

The effects of the hyperinflation crisis are still prevalent today. Primarily, the dire state of the economy precipitated the ousting of Robert Mugabe, by the army and his former deputy president Emmerson ‘The Crocodile” Mnangagwa, in a coup dé tat in 2017. The next section will analyze the declining economy and its current state before the abrupt transition of power.

Hyperinflation and its effects on the economy

Hyperinflation is pervasive insofar as it has had widespread effects on the economy and the daily lives of Zimbabweans respectively. Given this, it is essential to highlight significant trends in five economic indicators that authors such as Krugman (2012) and Stiglitz (2012) commonly use underline economic conditions. These indicators include income per capita, economic growth, inflation, life expectancy and migration respectively.

Figure 1: Income per capita between 1990-2016 (in $’s)
Figure 1Source: The World Bank Database, accessed 2018

Figure 1 above highlights the fact that income per person has been on a downward trend since the early 1990’s. It averaged $1880 in 1990 and 2001 and began declining significantly between 2001 and 2007. That corresponds with the drought and land redistribution respectively. That said the lowest level of income, $1167, occurred during the hyperinflation crisis in 2008. According to the World Bank’s PovCal database, 74 percent of Zimbabweans live under $5.50 a day. The aforementioned is 22 percent higher than the worldwide average of 52.4%. The government responded to the high levels of poverty by implementing significant cash in-kind transfers to the poorest of the poor, with 28% of the population on grants in 2011. Notwithstanding, it is evident that the economic policies had disastrous impacts on the economy as it is still below levels experienced over twenty years ago despite the relatively large concentrations of social grants and cash transfers.

Figure 2 below indicates a positive, albeit very volatile trend in economic growth across the observed period. A notable observation pertains to the decline in economic growth between 2001 and 2008. Here, the effects of the undermining of property rights through land grabs; the 51% local indigenization policy and economic sanctions drastically impacted the economy. Debt monetization and the effects of hyperinflation lead to a 17.4% decline in economic output in 2008. Fortunately, after the adoption of a multicurrency system, Zimbabwe has seen the semblance of an economic recovery with robust growth averaging 8.09%, albeit of a low base. That said, using data from the World Bank indicates that the country does not have any excess reserves, access to credit swap lines or the ability to increase their fiscal spending. Taken together, this implies that the nation can ill-afford another crisis soon.

Figure 2: Economic growth y.o.y change between 1990-2016 (in %)
Figure 2Source: The World Bank Database, accessed 2018

 

Figure 3: Inflation y.o.y change between 1990-2016 (in %)
Figure 3
Source: The World Bank Database, accessed 2018
Figure 3 above further highlights the impacts of the collapse of the economy and debt monetization respectively. As explained before, inflation increased between 2001 and 2007 and peaked in 2008. Interestingly, hyperinflation is under control upon the adoption of the multicurrency system. That along with capital flows has brought about a low inflationary environment that has been conducive to growth. That said a reduction in inflation has come at the cost of reneging on policy autonomy when using Dani Rodrik’s (2012) monetary policy trilemma framework. Aforementioned implies that the country cannot depreciate its currency to increase exports. Therefore, economic policy needs to focus on internal competitiveness and efficiency, which is a lot more challenging to do.

Figure 4 below indicates that the average life expectancy of a Zimbabwean at birth has been increasing within the observed period 1990-2016. That said, the average life expectancy declined by 5.8 years to 45.2 years at birth during 2001 and 2007. This decline is endemic to a country that faced significant economic regression. The exodus of many Zimbabweans within these periods further impacted the observed declining life expectancy during this crisis. Surprisingly, it increased in 2008 by 4.1 years to 49.3 in 2008 and has seen a further increase since 2008.

Figure 4: Average life expectancy 1990-2016 (in %)
Figure 4Source: The World Bank Database, accessed 2018

 

Figure 5: Net migration between 1972-2012 and the top 5 destinations
Figure 5
Source: United Nations Migration report: Zimbabwe (2013)
Figure 5 above highlights the fact that 1.3 million people left Zimbabwe between 1972 and 2012 respectively. Some argue that this is an understated representation of the actual number of migrants with numerous sources estimate that there are approximately 3 million Zimbabweans abroad. Notwithstanding, the highest levels of migration is observed in 2002 and 2007 with 2.6 and 2.25 percent respectively. These periods correspond with the land grabs and hyperinflation crisis respectively. Finally, the interesting point is that the highest numbers of Zimbabwean migrants are located in nearby and English speaking countries respectively. The most significant diasporas are in South Africa, the UK, Malawi, Australia, and Botswana. Furthermore, these international migrants have sent a considerable amount of remittances to Zimbabwe. The latest estimate from the World Bank’s database predicts that approximately 15.14% of GDP or $1.8 billion flows from abroad into Zimbabwe annually.

An analysis of the causes and effects of the hyperinflation crisis has been given above. Therefore, it would be prudent to proceed by explaining what the Zimbabwean economy and its newly anointed leader Emmerson Mnangagwa need to do going forward.

Next steps and policy implications

The final section provides a discussion on the next steps and policy implications for Zimbabwe and the nation’s new leadership. Given this, it would be best to present the IMF’s forecast for the Zimbabwean economy up until 2020.

Figure 6: IMF economic growth and inflation forecasts 2018-2020
Figure 6Source: IMF’s WEO Zimbabwe interim report (2017)

Figure 6 above highlights that both inflation and economic growth are expected to increase between 2018 and 2020. The upward trend is a definitive development for Zimbabwe. That said, to ensure that the country achieves the levels above of inflation and growth, the following policies are necessary. These policies include:
• Fiscal consolidation to increase budgetary space

─ Decrease public sector wage bill
─ Enhance efficiencies in government spending
─ Promote private sector investment and credit growth

• Enhance structural reforms
─ Improve transparency w.r.t natural resources
─ Enhance property rights
─ Ensure internal competitiveness to mitigate repercussions of external appreciations

• Engage with international investors to boost Foreign Direct Investment (FDI) and foreign aid respectively
• Engage with international creditors and renegotiate loans

 

Collectively these policies and engagements have the potential to restore the government’s credibility. Furthermore, these policies include the assumption that the nascent world powers will lift their ongoing economic sanctions. It remains to be seen what the Emmerson Mnangagwa government is both willing and able to do and achieve. The patronage networks established under Mugabe’s tumultuous reign supersede his transition from recent obscurity to being president. These networks will be complicated to uproot timeously. That said Mnangagwa had issued some statements that relate to the above policies that will be instrumental for Zimbabwe’s resurgence. Next year’s election is vital insofar as it is likely to determine the future of Zimbabweans both home and abroad. The world is watching with bated breathe for credible leadership that will return the nation to where it could and should be. That is, to the vanguard of the continent. Zimbabwe has the potential to be the culmination of a country of shared prosperity for its entire populous.

Works Cited
1. Federal Reserve Bank of Dallas. (2011). Globalization and Monetary Policy Institute 2011 Annual Report: Hyperinflation in Zimbabwe. Dallas: Federal Reserve Bank of Dallas.
2. Fisher, I. (1911). The Purchasing Power of Money (Vol. 2). New York: Kelley.
3. Food and Agriculture Organization of the United Nations. (2011). Food and Agricultural Commodities Production. Geneva: FAOSTAT Database.
4. Hanke, S. H., & Krus, N. (2012). World Hyperinflations. Institute for Applied Economics, Global Health, and the Study of Business Enterprise The Johns Hopkins University. New York City: Cato Institute.
5. Krugman, P. (2012). End this depression now. New York: W. W. Norton & Company.
6. Makochekanwa, A. (2009). Clothed in Rags by Hyperinflation: The Case of Zimbabwe. Munich Personal RePEc Archive , 1-12.
7. Mbeki, M. (2009). Architects of Poverty. Johannesburg: Picador Africa.
8. Meredith, M. (2007). The British, the Boers, and the making of South Africa: Diamonds, Gold, and War. New York.
9. Noko, J. (2011). Dollarization: The Case of Zimbabwe. Washington D.C: Cato Institute.
10. Stiglitz, J. (2012). The Price of Inequality: How Today’s Divided Society Endangers Our Future . New York: W. W. Norton & Company.
11. The Economic Times. (2008,, June 18). Zimbabwe Inflation Now over 1 Million Percent. Retrieved 05 02, 2018, from The Economic Times: http://articles.economictimes. indiatimes.com/2008-06-13/news/27696937_1_zimbabweinflation- Zimbabwe-dollars-Harare
12. The Guardian. (2002, February 22). EU imposes sanctions on Zimbabwe. Retrieved 03 26, 2018, from The Guardian: https://www.theguardian.com/world/2002/feb/18/zimbabwe
13. The International Monetary Fund. (2017). WEO report: Zimbabwe. Washington D.C: The International Monetary Fund.
14. The United Nations. (2013). United Nations Migration report for Zimbabwe . New York: United Nations.
15. World Bank. (2018, 04 01). World Bank Data Base. Washington D.C, Washington D.C, United States.

About the Author

Carlos Baeta
Proudly South African. Masters student at Fordham University in New York. Entrepreneur, young leader, coffee addict and an avid Liverpool fan. Let's change the world.

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