Hyperinflation In Zimbabwe

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Hyperinflation defined Begins when monthly inflation rates exceed 50 percent Ends when rate falls under 50 percent where it must stay for a year – Philip Cagan (1956) Zimbabwe entered hyperinflation period in March 2007; ended in 2009 Zimbabwe marked 30th such episode in history

Overview Introduction to Zimbabwe Before and during hyperinflation Zimbabwe’s inflation nightmare Effects of hyperinflation Stopping spiraling inflation Life after hyperinflation

Facts about Zimbabwe Located in Southern Africa 150,871 square miles Bordered by Zambia, Mozambique, S. Africa, & Botswana 150,871 square miles About the size of California 2011 population – 12.7 million Colonized by the British Gained independence in 1980 Robert Mugabe – 1st prime minister Mugabe government still in power Agricultural economy Main cash crop is tobacco First country to experience hyperinflation in the 21st century

Before Hyperinflation 1980 Annual inflation at 5.4 percent Largest currency denomination – Z$20 Z$ used in 95 percent of transactions 1US$ exchanged for Z$0.65 Real GDP expanded 14.6 percent Real GDP per capita at US$ 232 Unemployment rate at 10.8 percent in 1982

Before and During Hyperinflation 1980 2008—2009 Annual inflation at 5.4 percent Inflation at 231 million percent Largest currency denomination – Z$20 Largest Z$ denomination – Z$100 trillion Z$ used in 95 percent of transactions US$, S.A rand used in almost all transactions 1US$ exchanged for Z$0.65 1US$ officially traded for Z$4million in 2008 Real GDP expanded 14.6 percent Real GDP contracted by 17 percent Real GDP per capita at US$ 232 Real GDP per capita at US$ 136 Unemployment rate at 10.8 percent in 1982 Unemployment rate at 94 percent

After Hyperinflation 2010—2011 Z$ no longer in circulation US$ used in all transactions Annual inflation averaged 3 percent Real GDP expanded 9 percent Real GDP per capita increased 6 percent

Inflation soars amid hyperinflationary period

Real GDP contracts during most of the past decade

Zimbabwe’s tobacco production declines 64% drop

Population and labor force decline

Zimbabwe central bank government debt holdings increase sharply

Zimbabwe dollar depreciates sharply during hyperinflation era

Economic decline wipes out 53 years of income growth

Effects of hyperInflation “…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.” –Economic Times, June 13, 2008

“Inflation is always and everywhere a monetary phenomenon” —Milton Friedman

Inflation and money supply move in tandem Money Supply Growth, year/year Inflation, year/year

Stopping spiraling inflation Inflation expectations play a crucial role Government finance must be credible Adoption of an independent central bank Alteration of fiscal regime Exchange rate stabilization Adoption of a more credible currency

Post-hyperInflation Zimbabwe Encouraging signs of recovery Inflation down to single digits 2010 GDP expanded 9 percent GDP per capita expanded 6 percent in 2010

Inflation down since dollarization

Recovery expected to continue Real GDP growth International Monetary Fund Forecasts

Challenges remain Rebuild public finances & trust Institute policies to control government spending Reduce poverty Promote economic growth

Trust takes time to rebuild

Summary Zimbabwe – First country to experience hyperinflation in 21st century Excess money supply not backed by economic growth leads to loss of confidence in currency Hyperinflation produces adverse impacts Z$100 trillion – largest denomination in the history of money Zimbabwe’s case – a reminder of what happens when inflation and fiscal balances go unchecked

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