Zimbabwe: How Do You Rein in 231 Million Percent Inflation?
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UN Integrated Regional Information Networks
10 October 2008
Posted to the web 10 October 2008
Johannesburg
Zimbabwe's official annual inflation rate reached 231 million percent in early October, from the July estimate of 11.2 million percent, and the deadlock in talks between the ruling ZANU-PF and opposition parties is likely to push hyperinflation higher.
The state-run daily newspaper, The Herald, said the driver behind the inflation rate was wheat shortages that forced bakers to import ingredients, which led to a higher bread price.
After a succession of dismal harvests, attributed to environmental factors and political disruptions, nearly half of Zimbabwe's citizens will require food assistance in the first quarter of 2009, according to the UN.
Several attempts by President Robert Mugabe's government to bring down inflation - including lopping off ten zeroes from the currency, introducing a new currency, and price controls - have failed to put brakes on the multimillion percent inflation rate.
The importance of a political solution to counter hyperinflation was illustrated in the wake of elections this year, when the opposition Movement for Democratic Change (MDC) won a majority in parliament for the first time since independence in 1980, and MDC leader Morgan Tsvangirai narrowly missed winning the presidency.
"There is a widely held perception that the Zimbabwe dollar is seriously undervalued in the parallel market. The sharp 65 percent appreciation of the Zimbabwe dollar on the parallel market in the immediate aftermath of the 29 March 2008 elections suggests that this is, in fact, the case," said a recent UN Development Programme (UNDP) discussion document.
Independent economists have estimated the real inflation rate at billions of percent: Zimbabwe's financial malaise is not seen as a direct consequence of Mugabe's 2000 fast-track land reform programme, in which more than 4,000 white-owned farms were redistributed to landless blacks, it is rather a series of injudicious decisions overlaying structural economic weaknesses inherited from the former Rhodesia that are being amplified.
Dual economy
At independence Mugabe's government inherited a dual economy "characterised by a relatively developed and diversified formal economy sitting alongside a neglected and underdeveloped peasant-based subsistence rural economy," according to the UNDP discussion document, Comprehensive Economic Recovery in Zimbabwe.
The trigger for the current hyperinflation environment can be traced to the so-called 'Black Friday' crash of the Zimbabwe dollar on 14 November 1997, which was precipitated by the government's unbudgeted payment of gratuities to war veterans
This dual economy has not been addressed by the ruling ZANU-PF during 28 years of power, and "with the collapse of the formal economy and the exponential growth of the informal economy both in urban and rural areas during the crisis period, the problem has deepened, with most economic transactions and units now operating outside formal systems," the discussion document commented.
The trigger for the current hyperinflation environment "can be traced to the so-called 'Black Friday' crash of the Zimbabwe dollar on 14 November 1997, which was precipitated by the government's unbudgeted payment of gratuities to veterans of the liberation war.
"This was followed in 1998 by Zimbabwe's participation in the conflict in the Democratic Republic of Congo, which further contributed to the ballooning fiscal deficit," the UNDP document noted.
Inflation rose from 19 percent in 1997 to 56 percent by 2000, when the land reform programme was launched - spearhead by the war veterans - so that by 2006 inflation was running at more than 1,000 percent and reached hyperinflation levels by 2007.
"Zimbabwe's inflation is fundamentally caused by excess government expenditure, financed by the printing of money in an economy with a real gross domestic product (GDP) that has been declining for the last nine years. Money supply growth has been completely decoupled from economic growth, the inevitable result being continued and accelerating inflation," the UNDP said.
Between 1998 and 2006 Zimbabwe's GDP contracted by 37 percent, and by 2000 per capita incomes were lower than those in 1960.
Accelerating poverty
Poverty has accelerated, according to the 2003 Poverty Assessment Study Survey (PASS II), from 55 percent of Zimbabweans living below the Total Consumption Poverty Line (TCPL) to 72 percent of the population by 2003, or an increase of about a third in eight years.
A rider to Zimbabwe's economic deterioration is the effect of the HIV/AIDS pandemic, which UNAIDS and the International Monetary Fund (IMF) calculate may decrease GDP growth rates by between one and two percent.
Relevant Links
About 1.6 million Zimbabweans between the ages of 15 and 49 years old are living with HIV/AIDS, although prevalence of the disease declined from 20.1 percent in 2005 to about 15.9 percent by 2007.
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