Wednesday, August 19, 2009

How Bad Was Hyperinflation in Zimbabwe?

There is an interesting article in the latest issue of the Cato Journal by Steve Hanke and Alex Kwok. In this article, the authors estimate the amount of hyperinflation in Zimbabwe in 2008. This may seem like a trivial task, but no so for Zimbabwe:
Even though the Reserve Bank of Zimbabwe produced an ever increasing torrent of money, and with it ever more inflation, it was unable, or unwilling, to report any meaningful economic data during most of 2008. Indeed, the last Reserve Bank balance sheet and money supply data produced in 2008 were for March. As for the 2008 inflation data, the last available figures were for July, and these were not released until October. This data void hid Zimbabwe’s hyperinflation experience under a shroud of secrecy.
Hanke and Kwok fills this data void with their hyperinflation estimates. Here is their summary table from the article (click on figure to enlarge):

In plain English, the monthly rate of hyperinflation was 79.6 billion % in November 2008. That is an astonishing figure. Fortunately, the hyperinflation ended earlier this year when the government shut down its currency-printing presses and allowed foreign exchange to legally circulate. There was, however, a high price to pay for this hyperinflation and there is still much reform needed in Zimbabwe. Here is an excerpt from the IMF's 2009 Article IV for Zimbabwe:
Background. The economic and humanitarian situation worsened dramatically in 2008. Hyperinflation, fueled by the RBZ’s quasi-fiscal activities, and a further significant deterioration in the business climate contributed to an estimated 14 percent fall in real GDP in 2008, on top of a 40 percent cumulative decline during the period of 2000–07. Unemployment, poverty, malnutrition, and incidence of infectious diseases have risen sharply.

The official adoption of hard currencies for transactions in early 2009 recognized the de facto virtually complete dollarization of Zimbabwe’s economy. The government also recently announced that the rand would be the reference currency. Dollarization has helped stabilize prices, improve revenue performance, and impose fiscal discipline, including on the RBZ.

Outlook. Reversing output decline and improving social conditions would require determined efforts to maintain sound macroeconomic policies, and to attract domestic and foreign investors and significant donor support. In the absence of cash budget support, higher humanitarian assistance, and wage restraint, the economic and social situation could deteriorate significantly in 2009. Zimbabwe’s external debt burden is unsustainable even if policies are improved and medium-term financing gaps are filled by concessional financing.
I hope this is truly a new beginning for Zimbabwe.

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