Macro Economics Topic- Causes of Hyperinflation in Zimbabwe

1. Team Members:
Rachna Gupta (2020046)
Sandeep S (2020052)
Vignesh R Kumar (2020062)

2. In economics, hyperinflation occurs when a country experiences very high,
accelerating, and perceptibly "unstoppable" rates of inflation.
 Inflation is termed hyperinflation when the rate of inflation grows at more than
50% a month

3. Starts when
Government
begins printing
money to pay for
its spending
With increase
money supply,
prices rise as in
regular
inflation
Instead of tightening
money supply to stop
inflation, government
keep printing more
With too much
currency
sloshing
around, prices
ship rocket

4.  In 2008, Zimbabwe had the second highest incidence of hyperinflation on record.
The estimated inflation rate for Nov 2008 was 79,600,000,000%
 That is effectively a daily inflation rate of 98%. Roughly every day, prices would
double.
 Unemployment rate of close to 80%
 A toilet paper would cost you $417
 You have to spare a measly $50 Billion to buy an egg
 They even have a 100 trillion dollar note!
 And with ONLY two truck loads of money you could pay your restaurant bill!

6. Land Reforms
War Funding
Economic
Mismanagement

7.  The currency (Zimbabwe dollar) was heavily depreciated and this cause severe economic problems.
 The effect of currency under valuation is such that they had to print money with denominations in
trillions. In 2008, the annual inflation rate was 11.2 million percentage points, practically costing more
to print the money than the money is worth.
 Population Displacement: Hundreds of thousands of people were uprooted at the height of the crisis,
either fleeing to neighboring countries or displaced within Zimbabwe.
 Severe food crisis: Millions of Zimbabweans had experienced a huge scarcity of food and most of them
were surviving on just one meal a day and this is worsened by the droughts of mid 2000s.
 Life expectancy dropped: Life expectancy of people dropped and it has one of the lowest life expectancy
in the world and a large proportion of the people were depending upon food aid.
 The GDP growth rate of 2008 was -12.6 percent, more than doubling from the year before. Per Capita
GDP remains one of the lowest, at U.S. $200, and an unemployment rate of 80 percent.
 There is no room to invest in infrastructure or financial institutions. Zimbabwe has over 5 billion
dollars in external debt and imports over 2 billion dollars of commodities, while only having a little
over 6 million dollars in actual revenue.
 1 U.S. Dollar is worth 30,000 Zimbabwe Dollars in 2008.

8. GERMANY
 Had its roots in World War 1. The Germans had borrowed a large sum of
money to finance the war. When the supply of funds proved inadequate,
the Central Bank, Reischbank have no choice but to print more money to
finance itself.
 The effect of the devaluation of the German currency was like that of a
second revolution, the first being the war.
 At the same time, hyperinflation had worsened with the demand of
reparations by the Allies, to compensate for all the damages done to their
economies e.g. destruction of infrastructures & buildings. This forced
Germany to print even more money
 Later, the Germans decided to stop paying the reparations. In response the
French & Belgian troops occupied Ruhr in 1923, the more industrialized
area. They intended to get reparations in the form of goods & raw
materials. The government ordered workers to stop working as a mean of
boycotting. As governments had not much money to pay them, the only
option was again to print more money.
 The ratio of the German price index in November 1923 to the price index
in August 1922—just fifteen months earlier—was 1.02 × 1010. In October
1923, German prices rose at the rate of 41% per day
 Price inflation soon turned to hyperinflation as Germany fell into a
financial disaster. In January 1919, one US dollar ($1) had been worth 8.9
German marks. By November 1923, $1 was worth 200 billion marks.
 Money became worthless – stories existed of people stealing baskets but
leaving money. Prices rose so much that workers would rush to spend their
wages as soon as they got them. Restaurant prices would change from the
time a meal was ordered until it was eaten
 The government had 300 paper mills and 2000 printing companies
working 24-hour shifts to produce banknotes.
ZIMBAWE
 There were 2 hypotheses built around the cause of hyperinflation in
Zimbabwe. Firstly, critics argued that it originated from Mugabe’s
controversial land reform policy. Secondly, the supporters of Mugabe
argued that economic collapse is as a result of international sanctions by
US, EU & Australia.
 Zimbabwean government placed the blame onto businesses for recklessly
raising the price of their goods. So they attempted to distort the working of
the market via price intervention. In February 2007, central bank of
Zimbabwe declared inflation as ‘illegal’.
 Prices of goods were capped (refer diagram above). Those which raised the
price were arrested. From economics point of view, imposition of ceiling
price further discouraged production. This was the starting point to
worsening hyperinflation.
 More money was printed and yet there was a bottleneck in supply of
output.
 In early 2009 the government printed the largest denomination of
currency, that’s Z$100 trillion.
 A toilet paper would cost you $417. You have to spare a $50 Billion to buy
an egg. And with only two truck loads of money you could pay your
restaurant bill.
 commodities, while only having a little over 6 million dollars in actual
revenue.
 1 U.S. Dollar is worth 30,000 Zimbabwe Dollars in 2008.

9. Increased Government spend:
Decrease in production:
1. Increasing the pension and other
benefits to war veterans.
2. Excessive military deployment
in Republic of Congo.
1. Confiscation of property rights of
Royal Whites resulted in
lowering production and exports.
1. Foreign investors fled and so foreign
direct investment fell to 0 in 2001.
2. Evicted white farmers could not pay
back debts to banks.
3. Property rights to land was removed
and hence, land value reduced.
Consequences:
1. Government defaulted the IMF loan.
2. The government lost its credit
worthiness.
3. Zimbabwe had to make its own
national currency.
4. “Too much money chasing too few
goods”
Major effects:

10. Rapid death of the Zimbabwean dollar:
1. People tried ‘to get rid of their
Zimbabwean dollars’
2. US dollars became widespread
3. By February 2009 a ‘multi-currency
system’ was adopted.
IMF recommendations:
This brought to an end ten years of
high inflation and two years of
hyperinflation. As a result the price
level (in US dollars) stabilised, and
the economy started to recover.
1. Creation of a strong monetary anchor
2. The removal of price controls
3. Fiscal adjustments
4. Comprehensive structural reforms
5. Improved relations with the
international community
Other recommendations:
1. Full dollarization
2. Free banking
3. A currency board
LESSONS FROM THE
ZIMBABWE CRISIS

11. The Zimbabwe crisis is an example of how a
Government’s struggle to maintain political
power led to implementing policies that collapsed
an otherwise growing economy.
Fact check:Key takeaways:
Lesson 1:
How printing more money can lead
to inflation.
i.e. Growth in quantity of money =
Growth in prices
Lesson 2:
Price control doesn’t necessarily
work
LESSONS FROM THE
ZIMBABWE CRISIS

12. 1. economicshelp.org - https://www.economicshelp.org/blog/390/inflation/hyper-
inflation-in-zimbabwe/
2. www.researchgate.net
3. www.positivemoney.org
4. www.imf.org
5. https://honors.libraries.psu.edu - Analysis Of The Zimbabwean Hyperinflation
Crisis: A Search For Policy Solutions