Hyperinflation in Zimbabwe

Zimbabwe, suffering its worst economic crisis since gaining independence from the United Kingdom in 1980, has an official inflation rate of 4,500%. But 'real' inflation on essential goods is probably closer to 9,000%.

 

 

The remedies for hyperinflation are drastic, but simple. But so far, nothing seems to be working in Zimbabwe:

• A dose of 'shock therapy' could be administered, placing Zimbabwe under a currency board that allows its central bank to print only as much money as it has in foreign reserves. Yet this procedure will not help Harare.  For almost six years, the country has experienced an acute foreign exchange shortage, which has hit vital imports of fuel, electricity, basic foodstuffs and other commodities.
• Harare could declare a new unit of currency. This does not lessen the actual value of a currency, and happens over time even in countries with 'normal' inflation levels. But judging by previous attempts, the measure will have limited success. In 2006, Harare began circulating new banknotes with three noughts deleted from their values, but this has not checked hyperinflation.
• Zimbabwe's Reserve Bank could try to declare inflation illegal. Reserve Bank Governor Gideon Gono's plan to impose price freezes between March 1 and June 30 in cooperation with the private sector never materialised. However, in a more robust move the government introduced price controls two weeks ago and arrested 20 business executives for violations shortly afterwards.
• The government's pledges to end corruption and restructure the economy are likewise destined to fail. The black market, which already flourishes beyond the reach of tax collectors and regulators, will grab an even larger share of the economy during price freezes, as stores will be unable to turn a profit selling products at government-fixed prices. Zimbabweans will be pushed further out of the money economy and into barter.

Tougher medicine

Official dollarisation -- the adoption of a foreign currency, not necessarily the US dollar -- could be Harare's sole economic alternative. Ecuador took this step in September 2000 in response to a 75% plunge in its sucre currency. In fact, dollarisation has already occurred unofficially in Zimbabwe. Most people now convert their Zimbabwe dollars into hard currencies such as the US dollar or South African rand. Such transactions take place on a thriving foreign currency parallel market, where the US dollar is trading at up to 210,000 Zimbabwe dollars -- the official exchange rate remains just 250 to the US dollar.

However, there is not enough hard currency entering the Zimbabwean economy to facilitate dollarisation. Western governments have cut many ties to Harare, and private industry has massively curtailed its business there. Therefore, the prospects for economic stabilisation remain dim as long as President Robert Mugabe remains in power.