Zimbabwe’s Monetary Woes

Zimbabwe is suffering from a massive scale hyperinflation since the past few years. The prices of basic commodities like toilet paper are reaching sky heights. The people of Zimbabwe are going through a painful crisis when they don’t even have enough to eat and are barely surviving. This problem of hyperinflation is creating a huge amount of problem in handling of money, with the government regularly issuing notes of denominations as high as $100,000 in order to resolve the problems of dealing with huge amounts of money. But still, the new Zim $50,000 note is not enough to buy a bottle of beer or a newspaper. How can it be expected to ease the problems of carrying huge sums of money? Small businessmen have seen their original businesses dry up and see a more lucrative option of making knapsacks, which are a handier way of carrying money.

Enterprising street vendors have also spotted the gap in the market and stand outside banks dangling plastic bags, rucksacks and, for larger withdrawals, suitcases. Queues outside automated teller machines have become chaotic as customers struggle to withdraw enough money to cover basic daily groceries and transport fares.

Economic consultant John Robertson said that plastic money was not an option for most Zimbabweans as they cannot even meet “the basic requirements demanded by banks to open accounts” Banks have stringent conditions for new accounts, including proof of residence and a pay slip, but more than 70 percent of Zimbabweans remain unemployed.

The Reserve Bank of Zimbabwe eliminated three zeros from its currency after computers failed to read the figure trillion, creating nightmares for the banking and commercial sector. This means that if one were earning $1 million Zimbabwe dollars, that person will be now earning $1 000 Zim dollars. The government has also introduced a new set of bearer cheques replacing the entire set currently in circulation. The idea was kept under wraps and was unveiled only when the governor of the Reserve Bank of Zimbabwe introduced his first-half monetary policy statement. These bearer cheques have now become worthless. Holders of the bearer cheques have 21 working days to deposit the funds back into the banking system. The governor has been lamenting that inflation, hovering above 1000%, was the real enemy robbing every one of real value and savings.

The crisis started in the year 2000 when the Zimbabwean government effectively destroyed their agricultural industry by displacing farmers from their lands. Zimbabwe’s economy immediately went into recession and inflation began to rise.

This agricultural problem has primarily resulted as a consequence of Zimbabwe’s ( that is, Robert Mugabe’s) so called nationalist policies. Before 2000, most of the agricultural holdings in Zimbabwe were controlled by the whites. To redistribute land on a more equitable basis, to increase the land holdings of the blacks, an arbitrary policy was introduced. Land was taken away from major landholders and thereafter redistributed among the population. This sudden transition led to a drastic fall in agricultural production. This haphazard distribution of land among the masses left most with very small landholdings. Moreover, the poor masses did not have adequate capital to invest in commercial agriculture and technology so that the productivity of land could be improved. All large landholdings were diluted without giving sufficient compensation to the whites. These drastic and ill-thought land reforms were the root cause of Zimbabwe’s agricultural woes. As the production of food crops decreased, prices started rising all around the spectrum as a consequence of shortage. This was the starting of Zimbabwe’s phase of inflation. The currency started losing its value. They had salaries to pay, projects to finance, things to buy. Just like everyone else, they were suddenly faced with the crisis of having to pay much more for things, and since they didn’t have enough, they printed more money to cover it.

Zimbabwe’s Reserve Bank is state owned and the Governor, Dr Gideon Gono, has been ordered by Mugabe (on an ongoing basis over the years since 2000) to print amounts of currency that grow the money supply at a rate well over Zimbabwe’s inflation rate. Mugabe has in fact stated recently (in July 2007) that Zimbabwe will continue this practice of printing more currency as and when required.

This indiscriminate printing of money has led to hyperinflation.

Zimbabwe has been printing trillions of additional Zim dollars at a time when their economy has actually been contracting (quite rapidly). Zimbabwe’s real GDP has been stagnant for the last few years. The punitive regulatory measures that Mugabe has imposed on traders (ordering that they fix their prices), have served only to increase the rate at which Zimbabwe’s economy contracts. Hence, you have an ever-increasing amount of currency chasing an ever-shrinking amount of goods. As the printing of money has not been accompanied by a simultaneous increase in real output, Zimbabwe’s inflation woes have grown manifold. On the one hand, money has lost its value and yet on the other, prices of goods have increased. They can’t just stop printing money in order to solve the problem. If they do that, they won’t be able to pay government workers’ salaries which were recently hiked by 300% (which was an insufficient increase). They’ll default on all the things they have to pay for and they would definitely not want to deal with that scenario. They prefer to inflate their way out of their crisis. Zimbabwe will immediately enter a deep depression if currency growth halts. Arguably, they are in one already, but they can still buy things with Zim dollars. If money supply growth is frozen, people simply won’t have enough currency to buy anything anymore

However, if people cannot afford to buy anything, the prices should come down but there are problems associated with that also. Firstly, people are already suffering. Majority of the population is on the brink of starvation. Inability to buy necessities will only lead to large-scale famines. Moreover, Mugabe is trying to regulate the economy by barring businesses from raising their prices and in fact has ordered them (in July 2007) to reduce prices by 50%, in an attempt to rein in inflation.

This is a losing proposition for the businesses and hence their alternatives have been either to defy Mugabe or to cease trading. Those who choose to defy him are arrested. Hence, damage is being done to the entire business sector and their supply chains. Entire industries will be wiped out if they are not free to set prices rationally. The adverse government intervention might render the entire market mechanism defunct and ineffective.

That is the greater danger; that when the time comes that rational economic policies are applied, there will be no businesses left to respond. Confidence would have been completely lost and it will be difficult to lure the major chains back. The irrational policies of the Mugabe government are leading to a loss of credibility for Zimbabwe. Unless free and fair elections are held so that the people of Zimbabwe can elect a new party to govern, Zimbabwe will not recover. It will remain a crippled country.

Vibhuti Rathore