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Lessons from high inflation episodes for stabilizing the economy in Zimbabwe
International Monetary Fund (IMF)
IMF Working Paper (WP/07/99)
April 2007

http://www.imf.org/external/pubs/cat/longres.cfm?sk=20658.0

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Introduction
Hyperinflations are largely a modern and rare phenomenon generally associated with printing money to finance large fiscal deficits due to wars, revolutions, the end of empires, and the establishment of new states. According to Cagan’s (1956) definition, hyperinflation begins in the month inflation first exceeds 50 percent (per month) and ends in the month before the monthly inflation rate drops below 50 percent for at least a year. By this definition, during 1920 and 1946 there were eight hyperinflations, while between 1947 and 1984 there were none. Since 1984, however, there have been fifteen hyperinflation cases.

Zimbabwe has currently by far the highest rate of inflation in the world. Inflation, as measured by the official CPI, soared to 1,730 in February 2007. Since monthly inflation is still officially under 50 percent, Zimbabwe currently does not qualify formally as a hyperinflation case by Cagan’s definition. To closely align the cross-country experience with the current situation of Zimbabwe, this paper uses a 12-month inflation rate of 1,000 percent—rather than hyperinflations, strictly defined—as the threshold for identifying periods of very high inflation. While the 1,000 percent threshold may be somewhat arbitrary, the move from three-digit to four-digit rates of inflation can be seen as passing a psychological barrier.

It is worth mentioning, however, that the official CPI in Zimbabwe is likely to substantially understate inflation because about a third of the basket reflects price-controlled items and the consumption weights are outdated. Many in the private sector believe that the true rate of annual inflation was closer to 3,000 percent in February 2007. Monthly inflation rates in informal private indices—which are more heavily weighted by food—have exceeded 50 percent for several months. To the extent that the fall in real incomes has shifted the average consumption basket towards food, transport, and other basic items that move in line with the rapidly depreciating parallel market rate the understatement of inflation by the official CPI is likely to have increased over time.

Another distinct feature of Zimbabwe’s economy is the sustained contraction in output. Real GDP is estimated to have declined by about 30 percent since 1999. While the initial output collapse is widely attributed to the chaotic seizure of commercial farms—the backbone of the economy—other factors have also contributed in recent years: (i) high and accelerating inflation; (ii) price distortions due to extensive controls and regulation, particularly relating to the exchange rate which is fixed by the Reserve Bank of Zimbabwe (RBZ) at a highly overvalued rate; (iii) the collapse of investor confidence due to unpredictable policies and lack of respect for property rights, particularly in agriculture and mining; and (iv) minimal external financing because of poor relations with creditors and donors and deteriorating economic and social conditions.

Without an immediate stabilization package and comprehensive medium-term structural reforms, prospects are for Zimbabwe’s inflation to continue accelerating and for the economic crisis to deepen. Do the countries that have gone through similar episodes of high inflation in recent decades have lessons to offer for Zimbabwe? Section II of this paper examines high inflation episodes internationally during 1980-2005 and presents some stylized facts of successful stabilization programs. Section III analyzes reform elements that have been particularly critical for successful stabilization in other cases. Guided by these findings, Section IV identifies a set of policy actions specific to Zimbabwe that are essential, as a first step, to stabilize the economy. Section V looks at the role of official external financing during the stabilization process. Section VI concludes.

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