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The Hyperinflation in Zimbabwe ABSTRACT

The Hyperinflation in Zimbabwe
ABSTRACT: Zimbabwe’s economic crisis originates from its struggle for independence in the 1970s. Military adventures and reckless spending led to exploding budget deficits, and the forced seizure of commercial farms almost brought the agricultural production to a halt. Zimbabwe entered into a state of hyperinflation, which culminated in a de facto dollarization of the Zimbabwean economy, made official in early 2009 by the Minister of Finance.
Given all the hyperinflations of the past, the question to ask is whether the Zimbabwean experience is an isolated economic novelty; or is rather a repetition of the economic and political follies that have plagued some of the fiat governments of the modern world. This paper will provide a detailed history on account of hyperinflation in Zimbabwe.
INTRODUCTION
Zimbabwe, the former Rhodesia, is home to Victoria Falls and well known for its wildlife and natural beauty. Its rich soil supplied surrounding countries with the agricultural goods, and Zimbabwe played a significant role on the international food market. Military adventures and reckless spending led to exploding deficits, and the forced seizure of commercial farms almost brought agricultural production to a halt. In the final years of economic ruin, Zimbabwe entered into a state of hyperinflation, which culminated in a de facto dollarization of the Zimbabwean economy, made official in early 2009 by the Minister of Finance.
The crisis had its roots in Zimbabwe’s struggle for independence, which took place in the 1970s. This struggle, known as the Second Chimurenga, culminated in Zimbabwe’s declaration of independence on April 18, 1980. The incumbent President Mugabe has repeatedly referred to the current period of Zimbabwe’s history as the Third Chimurenga: the final stage in Zimbabwe’s battle against those he terms the “neo-colonialists”. These events arose in a time of momentous political action in the form of land reform, whereby nearly all the commercial farming land was expropriated from the largely white community of commercial farmers, and redistributed to the landless black majority. In early 2000, encouraged by government promises and the apparent lack of police intervention, hundreds of white-owned farms were invaded and taken over by war veterans. These events, coupled with the Zimbabwean government’s fiscal and monetary policies, led to progressively higher rates of inflation. A budget deficit can only be financed by limited means: by borrowing abroad, borrowing domestically, running down foreign exchange reserves, or by printing money.
The Zimbabwean Hyperinflation: The beginning of a crisis (1997-2000)
“In the second decade of its independence, the Zimbabwean government launched an economic reform programme essential in liberalizing the economy and dealing with the structural impediments to growth”. However, fiscal policy was weak and monetary policy unsteady during the time period; and the country suffered from two serious droughts (in 1992 & 1995), which affected Zimbabwe’s agriculture, its primary economic industry. A land reform had been a highly contentious issue since independence, as the majority of prime agricultural land was owned by about 4,000 white commercial farmers; while the indigenous population continued to engage in subsistence farming.
In the first five years of independence, land resettlement was conducted under government’s “first option to buy” at market prices: resulting in resettlement on some 3 million hectares. Subsequently, the 1992 Land Acquisition Act provided for compulsory purchase of farms, as long as the property was derelict, located on underutilized land, owned by absentee landlords, or surrounded by communal areas, and the owner had multiple farms. The act required fair compensation and provided a right of appeal.
In the second half of 1997, under mounting political pressure, the ZANU-PF government announced a new compensation and pension plan for war veterans of the independence struggle. The payouts applied to approximately 60,000 war veterans, each of whom were to receive an immediate compensatory payment of ZW$50,000 (the equivalent of US$ 3,000 at the time), alongside a monthly pension equivalent to US$125. The total package amounted to approximately 3 percent of the 1997 GDP; and was not included in the 1997 budget for the fiscal year. The payments had the immediate effect of inflating the budget by 55 percent on the previous year. The following month, Zimbabwe’s standing line of credit with the World Bank was suspended until the government had demonstrated that the payments would not result in a higher than the projected 8.9 percent budget deficit in the 18 months leading to December 1998.

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