Zimbabwe Economy: Inflation, Famine and Instability

Harare, 20 Aug 2008. Zimbabwe has been experiencing ridiculous inflation, widespread famine, social instability and an uncompetitive economy. What was the cause of these disastrous conditions, and what can be done to avoid them in the future?

Harare, 20 Aug 2008. Zimbabwe has been experiencing ridiculous inflation, widespread famine, social instability and an uncompetitive economy. What was the cause of these disastrous conditions, and what can be done to avoid them in the future?

Since oil hit a high of $147 per barrel in July of 2008 consumers have been worried about inflation. Even before that, with prices of staple foods increasing and global economic uncertainty abound, all price hikes have been felt, and consumers are becoming increasingly concerned. In the US, the average monthly inflation rate for the first seven months of 2008 was 4.4%, a rate unseen in the past 17 years. In July 2008, EU inflation was in a similar range, with the UK experiencing slightly lower figures.

All of this pales in comparison to what Zimbabweans have experienced over the 28 years, since the Zimbabwean dollar first emerged.

In 1980, one Zimbabwean dollar (ZWD) equaled US $1.47. Now one ZWD equals US $0.06. Does that seem bad? It gets worse – this six-cent valuation of the ZWD is after the government redemoninated it by a factor of ten billion: 10,000,000,000 old ZWDs now equals one new ZWD. In other words, it’s worthless.

This represents an estimated inflation rate of 40,000,000-50,000,000% in July 2008. This figure cannot be calculated precisely because most computers are not capable of doing so with so many digits involved, and because of the lack of availability of most basic goods.

When inflation is rampant, citizens stockpile goods, as they are worth more than the money that could buy them. This creates a scarcity of supply, and makes valuating inflation difficult.

Zimbabwe has been plagued with inflation since its currency began in 1980, but the hyperinflation only began in about 2004, with the rate hitting 624% early in that year.

The land reforms in the early 90s had a drastic effect on food supplies. These reforms led to President Robert Mugable taking land back from white farmers. Since the brutal farm invasions, crop production has plunged and the economy has suffered. Now, more that 4 million people, or a third of the nation, have to rely on aid from the World Food Programme.

Agricultural exports, which were once a significant source of income to the fertile country, have all but vanished, and this has resulted in Zimbabwe incurring even more of a trade deficit. Mugabe attributes its lack of food to former-British Prime Minister Tony Blair’s use of chemical weapons to initiate famine and drought in Africa.

Hyperinflation also robs the citizens of any wealth they may have had. It also causes any little wealth there may be in the nation to be converted into a more stable currency, such as gold, the US Dollars, Euro, Pounds or physical assets overseas. This exodus of currency further reduces the country’s financial capacity, and the problem continues to worsen.

The government feels the pain, too. Any taxes paid become nearly worthless by the time they reach the government (the receivable amount is never met by the payable), nobody will buy the government debt, and the financial power of any entity holding such debt is immediately reduced.

In early 2007, the country’s central bank banned any price rises, stating that inflation was illegal. Yet with few people buying or selling anything how will this help? Will Zimbabwe have to abandon their currency entirely and use something else? Or will it take a fundamental change in government leadership to pull the country back into the global scene?

Year Inflation Rate
1980 7%
1981 14%
1982 15%
1983 19%
1984 10%
1985 10%
1986 15%
1987 10%
1988 8%
1989 14%
1990 17%
1991 48%
1992 40%
1993 20%
1994 25%
1995 28%
1996 16%
1997 20%
1998 48%
1999 56.9%
2000 55.22%
2001 112.1%
2002 198.93%
2003 598.75%
2004 132.75%
2005 585.84%
2006 1,281.11%
2007 66,212.3%
2008 9,030,000%

Charles Cole, EconomyWatch.com