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Zimbabwe Struggles with Hyperinflation
Zimbabwe Struggles with Hyperinflation
Posted

By - Adedoyin Shittu

Posted - 17-10-2019

Zimbabwe now has the world’s second highest inflation after Venezuela, according to International Monetary Fund figures and for the second time in two decades, the economy entered into hyperinflation.

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The southern Africa country economy is under immense pressure with its citizens grappling with rising prices and struggling to keep up with the limited supplies. Standards of living for ordinary Zimbabweans and business operations have deteriorated, amid tumultuous price escalations and rapid erosion of incomes, many families in the country are now living on a single meal a day. The price of bread even shot up yesterday by 60% as bakers said they were forced to hike their prices due to rising production costs. Bread is the second most important staple in the country after a thick cornmeal porridge known in the local Shona language as “sadza”.

On Monday- October 14, rural teachers in the country embarked on strike action with a stay-at-home protest “against underpayment”. Government workers also said they can not afford to go to work after the surging inflation have shrunk the salary by 15 fold and slashed the value of their pay by more than 90%. “Our salaries have been eroded from an average of US$500 in 2018 to only US$40 which is declining everyday,” said Cecilia Alexander chairwoman of the Apex Council, the umbrella union representing most public sector workers outside the uniformed forces.

Nurses at two of the country’s largest government hospitals in the country’s capital also reduced their working days from five to two last week and doctors in Zimbabwe have been on strike for over two months even after government attempt to increase pay and have defied a court order to return to work, saying a pay rise offered by the government is too low. The high inflation has reduced the doctor’s pay to the equivalent of about $100 (£80) a month.

Fuel and electricity prices have also rocketed by more than 400% since the start of the year amid crippling power shortages which have plunged parts of the country into darkness for up to 18 hours as the economy lurches deeper into crisis.

The economy has been on a downward spiral for more than a year as hopes fade that Mugabe’s successor and former deputy, President Emmerson Mnangagwa, will deliver on his promises of prosperity. While government on Tuesday, October 15, said the official annual rate of inflation stood at 290 percent, economists estimate annual inflation to stand at around 600 percent, dimming hopes of recovery promised by Mnangagwa. However economist, Steve Hanke yesterday, said inflation in Zimbabwe has in reality reached 851%.

The poor have been the hardest hit by the rising inflation as price of commodities spikes and erode incomes. The tumbling Zimdollar has resulted in the skyrocketing of prices of basic commodities and due to exchange rate instability and differentials, salaries and wages have been eroded almost 20-fold in real terms. Company balance sheets, value, stocks, pensions and savings have also been badly eroded. The situation has also been exacerbated by exchange rate movements amid signs of worsening poverty levels. The fall of the Zim Dollar has resulted in property owners or landlords abandoning the rapidly depreciating currency and charging rentals in foreign currency to preserve value.

In August of this year, protestants of the Movement for Democratic Change (MDC) opposition party took to the street in a series of nationwide demonstrations to protest against a crashing economy and the government of President Emmerson Mnangagwa. This was in defiance of a court order banning anti-government protests. They were met with brute force from the Zimbabwean police who fired tear gas and bludgeoned the protesters with batons at the country’s capital.

Zimbabwe history with hyperinflation
Zimbabwe first experienced hyperinflation from around 2005 till 2008, peaking in 2008 at 500 billion percent. The US$1 became equivalent to Z$2 621 984 228. Zimbabweans wanting to buy basic goods like bread and milk were forced to carry plastic bags bulging with bank notes to pay for their purchases. In 2009, the country’s currency collapsed under the weight of hyperinflation and the government then adopted a multi-currency system dominated by the dollar.

What Caused The Hyperinflation in Zimbabwe
Former Finance minister Tendai Biti, who is also Parliamentary Portfolio Committee on Public Accounts chairperson, said the current hyperinflation the country is facing is as a result of bad governance and a confidence deficit in the economy. “We are not producing. There is no productivity. There is no confidence in the Zimbabwean dollar. So what is happening is just a vote-of-no-confidence in this currency,” Biti said. “There is disequilibrium in the economy, there is too much money chasing too few goods — hence high inflation. This is what happens when you increase money supply into the economy. These guys are overspending. They are creating more money supply and the rates shoot up. This is what happens when you demonetise the US dollar, you commodify it.”

In June 20, the administration of Mnangagwa ended the multi-currency system with th introduction of the Zimdollar to strength the economy but as Tendai Biti pointed out, the people of Zimbabwe have little confidence in the value of their currency and this has contributed immensely to the present hyperinflation the country is facing. While money itself does not have value, the trust behind any currency gives it value. Over the years Zimbabweans have demonstrated little faith for the Zimdollar. In Zimbabwe, too many people buy foreign currency. It is simpler than buying shares or property and it can be done for small sums as well as large. Currency can also be liquidated in minutes if there is a sudden need for local dollars.

The US dollars is most specially a commodity that is cherished by the people of Zimbabwe for transaction and at times Zimbabweans are prepared to pay almost anything for US dollars. Those with US dollars, either net exporters with retained earnings in nostro accounts or recipients of Diaspora remittances in similar accounts or bank notes under the mattress, are not in a hurry to sell these foreign dollars, preferring to keep their spare cash in the original foreign currency until they have to pay bills or make purchases inside Zimbabwe. Simply said, holders of foreign currency ost especially the US dollars are either hoarding it or are been prudence with it and are not ready to release it into the economy.

The temporary freezing of a handful of bank accounts pinpointed as the source of the RTGS dollars being used to buy US dollars at almost any price also aided the country’s inflation. The very small number of accounts that had to be frozen to burst the black-market made the price of foreign currency to rise up. In turn, the rising cost of foreign currency drove up the cost of imported products, services and raw materials and also drove up the price in local currency of the final products at retail levels. Added to the rising cost of imports has been rises in purely local costs, such as salaries and wages, as respectable employers try to cushion their staff or have to absorb the rising costs from others who are doing just that.

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Unfortunately, many think that things will get worse, or they want to at least hedge against that risk. This fear has an undesirable feedback and it is hurting the Zimbabwe economy but increasing the exchange rates, the puts up costs, and the prices of everyday commodities.

Aside other things that need to be done in Zimbabwe in order for the government to secure its economy, the government needs to work on the people trust on the currency value before weaning them appropriately from foreign currencies.

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