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Hyperinflation - what and why?
Deniz Kellecioglu, Zimbabwe Coalition on Debt and Development (ZIMCODD)
May 08, 2007

Hyperinflation is a price change pace (inflation) that is very high and unpredictable. The current (April 2007) inflation rate in Zimbabwe is extremely high, above an estimated 2 200 percent, as an annual rate. During the 1980s the average annual inflation was about 13 percent, while in the 1990s it was about 25 percent. The rates continued to rise to new levels from 1998 to 2005 with an average of 182 percent. Last year it reached furious heights with a rate of 1 200 percent. Over a longer term, inflation should not be over 10 percent annually, preferably around 3 percent.

Whilst Zimbabwe currently records the world's highest inflation rate in the world the phenomenon is not new in economic history and not incurable. A lot of countries have experienced hyperinflation, mainly in the 1970s and1980s. It is usually experienced over several months or even years, with examples ranging from 100 to 33000 percent. Most often the concept is experienced before and/or after a national turbulence. In the case of Zimbabwe, this turbulence was largely triggered by the Z$50 000 (old currency) pensions paid out to tens of thousands of Liberation War veterans from September 1997. However, from an economic view, three elements determine inflation rates: the supply, demand and confidence in the economy.

Economic production (supply side) fell drastically with the tumultuous events of the land reform that started almost ten years ago. It is a clear-cut fact that Africans ought to have their land back - economic justice, it is what we struggle for! However, the aftermath clearly indicates that the methods to create this justice where unprofessional, chaotic and with neither parties (Zim government, UK government, the landowners, nor the land-takers) taking sufficient responsibility for the people of Zimbabwe. The negative actions lead to abruptions and reductions in agricultural production, and when shortages strike an economy, prices will rise. This is the supply effects - the less you have of a particular product, the higher its price. Inflation will particularly escalate if basic goods have lower supply than demand.

The production disturbances in Agriculture led inevitably to income reductions, not just in the agricultural sector, but also in other sectors. During this negative development, more people where losing their jobs or having their salaries cut (household income), businesses were losing profits (corporate income), while the public sector was missing out on taxes (public income), altogether decreasing the purchasing power in the economy. This is the demand effects, if you have less income, you consume less. In other words, the less people ask for a particular product, the lower its price. And since incomes are not adjusted according to the speed of the inflation, the purchasing power in the economy will deteriorate further.

Overall, both supply and demand have gone down in Zimbabwe, but as far as price levels are concerned, supply shortages have dominated over demand effects, creating a vicious circle of lower and lower income levels, which implies lowering the motivation for production. Also, another dimension making things more complicated is the volatile price changes within a given time period. Prices on some goods might temporarily go down after, for instance, harvests, or when huge bulks of imported goods enter the economy, or when relevant foreign currencies fall on the global market so that imported goods are cheaper. Prices will go up for the opposite reasons.

What makes it even more complicated is the state price controls. This is when government decides that some products are not allowed to pass a certain price limit (aiming to hamper inflation). But if the inputs are more expensive than the output product, the result may be illegal sales or no production at all - effects we know occur in Zimbabwe.

This takes us to the third fundamental element determining inflation; the reliability and predictability of the economy. Prices vary according to supply and demand, but when companies increase prices in order to limit and compensate for potential future economic losses. People simply tend to become more short-time oriented in an uncertain environment. In such cases, everyone who sells something aims to take out as much profit as possible now with the fear of having no profit opportunity later. This is particularly true with unexpected disturbances in the economy, prices increase in such cases reflecting the level of desperation. This is the confidence effects - the more uncertain environment, the higher price changes.

Lack of confidence in the economy also make people emigrate (economic refugees and "brain drain"), while companies move their activities and/or their capital out of the country. These effects worsen the three elements further, by lower levels of consumption (demand), lower economic production (supply), and worsen the already grim prospects of the country (confidence).

A final note regards the money supply. When inflation has become a significant force in the economy, the circulating money bills are not enough anymore. Therefore, the Central Bank, Reserve Bank of Zimbabwe (RBZ) has to order more bill printing so as to meet the money demand from real production values occurring in the economy at new price levels. However, when people and business become aware that there are more bills in circulation, they will raise their prices because they know that the new bills are artificial - no real value has entered the economy. The RBZ/government also prints money because it is possible for them to finance costs during the initial time after printing.

Presently Zimbabwe is now in a state where the greater portion of the inflation is fed by inflation itself. Because there is no proper solution in the horizon, everyone is expecting escalating prices, and so more inflation will come through their price setting behaviour. On a greater economic level, through all the downward issues mentioned above, Zimbabwe's economy is continuously losing value. That means Zimbabwe is growing negatively. The statistical figures reveal that Zimbabwe was twice as rich just ten years ago (in real terms -excluding inflation).

Zimbabwe has great potential to overcome these rough times. In order to induce positive development we need a concrete and proper solution that raises confidence in the economy, like for instance a powerful social contract.

*Deniz Kellecioglu is an economist in the ZIMCODD Policy and Advocacy Department

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