Back to Index
the money presses
May 03, 2007
There is inflation, high inflation
and then there is hyperinflation. The first one is acceptable, the
second worrying and the third is a nightmare.
Zimbabwe falls in the latter camp.
Hyperinflation, put simply, is very high inflation. A country is
usually classified as having hyperinflation when the monthly inflation
rate is greater than 50%. Latest
data shows inflation at 2 200% for March, up from 1 594% in
What this means is that goods that
cost $100 this time last year now cost $1 829. In most developed
countries inflation runs at under 4%.
High inflation is caused by "too much
money chasing too few goods". Hyperinflation is an exacerbated state
of high inflation usually resulting from a rapid growth in the supply
of paper money.
This usually occurs on the back of
governments financing their expenditures via the country's printing
press -- or the central or Reserve Bank. The printing press produces
reams of new cash to fund expenditure such as foreign debt repayments
or wages for a bloated civil service workforce.
It's a vicious circle. The government's
printing pushes up the supply of money in the economy, which leads
to competition for goods that, in turn, pushes up the price of those
To cover expenditure for the same quantity
of goods, the government has to print more money, which leads to
higher prices as people rush to buy goods today to avoid paying
higher prices tomorrow. This accelerated demand pushes prices up
even further and so the circle continues and hyperinflation prevails.
The victims of hyperinflation are people
whose income levels cannot keep up with the rise in prices of goods
and services. The government's means of financing its expenditures
becomes an added "tax burden" to people -- their purchasing power
falls at the expense of the government.
Other beneficiaries of hyperinflation
are speculative suppliers of goods. If you have a warehouse full
of inventory, delaying sales will allow the seller to recoup higher
prices from consumers. Hyperinflation periods are often accompanied
by periods of civil unrest.
Zimbabwe is not the first country to
suffer from hyperinflation. Germany went through a period of hyperinflation
after World War I. More recently, Bolivia experienced severe hyperinflation
that peaked around 12 000% in 1985.
However, both Germany and Bolivia conquered
the beast and restored stability to prices and the economy. In Germany,
the government created a new unit of currency whose value was directly
linked to tangible assets, in this case gold. The new unit could
be converted to gold on demand. This restored value in the currency
and gave people faith that the government was committed to halting
the supply of money.
I doubt this would be sufficient in
Zimbabwe today with the current leadership -- people have lost faith
in the government. In addition, it is unlikely that the government
has sufficient gold reserves to back the currency.
Zimbabwe may have to go the Bolivian
route -- shock treatment under a new government. The Bolivian government
removed all price controls and simultaneously froze payrolls to
curb expenditure. The first policy removed incentives for speculators
in the market and thus led towards a normalisation on the supply
side (no more hoarding of inventories).
The latter ended the need to keep printing
money -- simply put, the government made a pledge to live within
This could work in Zimbabwe. Most people
realise that the current state of affairs is unsustainable. However,
we should not under-estimate the extent of the social shock involved.
Initially, there could be a worsening in inflation as the instigated
price controls have kept the prices of basic commodities such as
oil well below black market rates.
The combination of higher prices and
zero wage growth would curtail demand swiftly, which would result
in a stabilisation of prices. Unfortunately, people, especially
low-income earners, would bear the brunt of these economic adjustments.
To alleviate these adverse effects,
the government should simultaneously adopt policies to boost the
level of forex in the country and stimulate growth of the economy.
These include, but are not limited
to, reviving the agricultural and manufacturing sectors, which are
not only important for domestic consumption needs, but also generate
much-needed foreign exchange.
Bottlenecks and impediments to trade
need to be addressed, especially in terms of duties and tariffs.
This will help lower the end cost of goods in the country, which
should also help with price stabilisation.
Reviving the tourism sector would also
boost foreign exchange reserves and stimulate job growth.
However, none of the above is likely
to be sufficient to sustain price stability if the government does
not refrain from living beyond its means. Given that Zimbabwe is
currently running a budget deficit in excess of 40% of GDP, there
will have to be large rationalisation of government departments
-- and this could begin with the army.
On the income side, better tax collection
will afford the government more flexibility on expenditures.
We would like the Zimbabwean finance
minister to one day be faced with the same problem as his South
African counterpart, Trevor Manuel, of significantly higher than
expected tax revenues resulting in headaches of how best to spend
it all. And how better to spend it than on socio-economic programmes
financed by the government, which has not had to print a single
note for any of it.
*Nothando Ndebele, an economist,
is head of research at Renaissance Specialist Fund Managers of South
Africa and a founding partner in the firm
Please credit www.kubatana.net if you make use of material from this website.
This work is licensed under a Creative Commons License unless stated otherwise.