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A PROJECT REPORT

ON

Zimbabwe Rate of Inflation

Submitted to Submitted by

Dr. Shikha Oza Ashini Mody

(08BS0001751)

Sec-B

In fulfillment for the project given to us in

MACRO ECONOMICS

IBS –Pune

ICFAI University



Acknowledgement

I express my deepest and most sincere thanks to Dr. Shikha Oza for giving me this

opportunity. The project could not be complete without her support and guidance.

Thanking her is a small gesture for the generosity shown.

A project report is the result of pooling of several ideas, suggestions and contributions

involving several minds, rather than an individual work. So it is incomplete without the

mention of names of those people who made it possible.

I express my gratitude to Dr. Shikha Oza for helping me and providing use with useful

information. Interacting with her I learnt few tricks of professional management and I am

sure the knowledge imparted will go in along way in enriching my career.



Abstract

Inflation breaks all the records in Zimbabwe. But it's a wonder how at this inflation-level,

its economy is still surviving, the country has observed election and Robert Mugabe has

lost. Inflation in Zimbabwe has broken all the records and is first such country of the list

where inflation has reached to an uncountable percentage. Name of Zimbabwe will

probably appear in the Guinness Book of World Records. In Nov, 2008 the rate of

inflation is 89,700,000,000,000,000,000,000%. We have to say thanks to the Country’s

Central Bank (CCB) and the people who are involved in inflation calculation. Our focus

of this project is to study the impact of inflation on political, social life of Zimbabwe.



INFLATION

An increase in the general level of prices in an economy that is sustained over a period

of time is called inflation. The emphasis on the ‘general price level’ which is ‘sustained

over a period’. Inflation is measured for a basket of goods and services. Within the

basket, prices of some of the goods and services may rise and prices of some of the

goods and services may fall. When the overall price of the defined basket increases, it is

called inflation.

Some people believe that money growth and inflation go hand in hand. While money

growth is very important in explaining inflation.

• A sustained increase in the growth rate of money will be there in the long run

when all adjustments have taken place. In the long run, the inflation rate is equal

to the growth rate of money adjusted for trend growth in real income.

• A sustained increase in money growth will have no long-run effects on the level of

output.

Although any increase in the price level is usually called an inflation, we need todistinguish between the forces that cause a once and for all increase in the price level

and those that cause a continuing or sustained and increase. Any event that tends to

drive the price level upwards is called an inflationary shock.

Also, inflation and unemployment are closely related, at least in the short term. Inflation

is generally considered to be undesirable, especially when it is unexpected because it

distorts the signals that are provided by the price system.



HYPERINFLATION

Although there is no precise definition of the rate of inflation that deserves the star

ranking of hyperinflation rather than “high inflation,” a working definition is that a country

is in hyperinflation when its annual inflation rate reaches 1000 percent per annum.

In a hyperinflationary economy, inflation is so pervasive and such a problem that it

completely dominates daily economic life. People spend significant amounts of

resources minimizing the inflationary damage. They have to shop often so as to get to

the stores before the prices go up. Their main concern in saving and investing is how to

protect themselves against inflation. For this they reduce holdings of real balances to a

remarkable extent to avoid the inflation tax but have to compensate by going to the bank

more often daily or hourly instead of weekly. It seems difficult to believe that countries

can function for any length of time with inflation rates of several hundred percent or

more. In fact, they do not function well, and sooner or later they will stabilize a high

inflation simply because the economy turns chaotic. Such high inflations are frequently

associated with high deficits.

But there is a two-way interaction between budget deficits and inflation. Large budget

deficits can lead to rapid inflation by causing governments to print money to finance the

deficit. In turn, high inflation increases the measured deficit. There are two mechanisms

through which inflation increases budget deficits: tax collection effects and increases in

nominal payments on the national debt.



Introduction:

Zimbabwe was formed in 1978 when south and north Rhodesia was united to form

republic of Zimbabwe. Robert Mugabe was elected as its first president and he is been

ruling the land for last 28 years. His stay in the power for such a long time has proved to

be futile.

After Independence (1980) Zimbabwe quickly paced towards the path of development.

She was considered to Be the most strongest & fastest growing economy in Africa.

The source of Zimbabwe's hyperinflation is the Reserve Bank of Zimbabwe's money

machine. The government spends, and the RBZ finances the spending by printingmoney.

The RBZ has no ability in practice to resist the government's demands for cash.

Accordingly, the RBZ cannot hope to regain credibility any time soon. To stop

hyperinflation, Zimbabwe needs to immediately adopt a different monetary system.



She stood as an outstanding example for Other African nation When she received

recognitions From UNO & West for its Excellent governance and trade policies .

But her success only seemed to be a “flash in the pan”. In 1997 Things started going

wrong. And since then Fortune Never Smiled On Zimbabwe…… And from then

Zimbabwe’s

Lost her prosperity, and grip in the hands of evil (INFLATION).



HOW BAD IS INFLATION IN ZIMBABWE?

“If you need something and have cash, you buy it. If you have cash you spend it

today, because tomorrow it’s going to be worth 5% less.”

Well consider this: at a supermarket near the center of the capital, toilet paper costs

$417. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply

sheet. A roll costs $145,750- an American currency about 69 cents. The price of toilet

paper like everything else here soars almost daily.

But what is happening is not a joke. For end numbers of Zimbabweans, toilet paper and

bread, margarine, meat, even morning cup of tea have become unimaginable luxuries.

All are causalities of the hyperinflation that is roaring toward 1000 percent a year a rate

usually seen only in war zones.

Zimbabwe has been tormented their entire decade by both deep recession and high

inflation but in recent months the economy seems to have abandoned whatever

moorings it had left. The national budget has already been largely spent. Government

services have started to crumble.

Zimbabwe’s inflation is hardly history’s worst. Public-school fees and other ever-rising

government sub charges have begun to exceed the monthly incomes of many urban

families lucky enough to find work. At the same time, Mr. Mugabe’s government has

printed trillions of new Zimbabwean dollars to keep their ministries functioning and to

shield the salaries of key supporters and potential enemies against further erosion.

This had worsen inflation for printing too many worthless dollars is in part what got

Zimbabwe into this mess to begin with. Zimbabwe fell into hyperinflation after thegovernment began seizing commercial farms in about 2000. Foreign investors fled,

manufacturing ground to a halt, good and foreign currency needed to buy imports fell

into short supply and prices shot up.



ZIMBABWE – TURMOIL DEEPENS

Zimbabwe is characterized these days as Political stalemate, uncontrollable inflation,

cholera “genocide” and Robert Mugabe. Once listed among Africa’s richest countries is

now struggling to control its inflation rate running into millions.

The political stalemate in the country deepened when President Robert Mugabe refused

to accept the victory of Movement for Democratic Change leader Morgan Tsvangirai in

March’s presidential Election. Meanwhile, the Mugabe government continued its

crackdown on the opposition. In this election Tsvangirai was elected by 47.9% votes as

against Mugabe 43.2% votes. But as Tsvangirai withdrew Mugabe came into the power

by 85% of the votes. Meanwhile, domestic reconciliation efforts were short lived as the

power sharing deal brokered between Mugabe and Tsvangirai pushed the country into

chaos. The political problems in Zimbabwe failed to curb economic and health distress.

Economic shocks of Zimbabwe-It’s easy to become a billionaire

This South African country is on the verge of collapse with its economy, public health

and food facing the worst crisis which one could ever imagine. Zimbabwe is

experiencing a major currency shortage, which has led to hyperinflation and the current

inflation rate is staggering 231% million. The prices are doubling on a daily basis and

200,000 Zimbabwe Dollar is used to buy a loaf of bread. Due to this crisis, the Reserve

Bank of Zimbabwe has launched a 200 million dollar note which is worth just 28 US$. As

on 6-Dec-08, value of 1 Indian Rupee= 2196 Zimbabwe Dollar.



CURRENT CRISIS FACE BY ZIMBABWE

Zimbabwe is now suffering from crisis. Crisis of Economic, Social and Humanitarian.

• The Economic crisis includes:

i. Acute shortage of foreign currency with all its obvious repercussions

ii. Critical shortage of fuel, which permeates the entire economy.

iii. Shortage of basic commodities such as food, drugs, sanitary ware, etc.

iv. Galloping inflation hovering around 86.7 sextillions [ percent].

v. Limited supplies of electricity leading to constant power cuts which cripple

agriculture, industry and commerce.vi. Shortage of water treatment chemicals.

vii. Runaway budget deficit.

viii. Very high interest rates which are ironically far below the inflation rate.

ix. Official exchange rate competing with the parallel market rate which fuels

inflation.

x. Acute shortage of cash in banks and in circulation, crippling economic

activity.

• The Social crisis includes:

i. Unprecedented unemployment rate of around 90 percent.

ii. Collapse of the health delivery system caused by shortage of drugs,

obsolescence of equipment and flight of health personnel.

iii. Instability of the education system resulting from humiliation and

intimidation of teachers, strikes, shortage of food at boarding schools and

tertiary institutions etc.

iv. Virtual collapse of the transport system, unaffordability of the bus fares,

shortage of fuel and spares.

v. The culture of impunity and lawlessness.



vi. Living standard of people fell up to 38%.

• The Humanitarian crisis manifests itself in mass starvation and internal

refugees from both urban and rural areas who run away from intimidation, torture,

rape, retribution etc. Mass starvation was caused by the violent and chaotic land

grabbing programme and the deliberate denial of food to perceived opposition

supporters.

• The Political crisis stems from the rigged 2002 presidential election. By stealing

victory, ZANU PF leader Mr. Robert Mugabe became the illegitimate head of

state. For the opposition MDC, the solution is holding fresh presidential elections

which it hopes to win. MDC victory will, according to the opposition party, give it

the Constitutional right to govern.



FACTS ABOUT ZIMBABWE

• Zimbabwe is the first country in the 21st century to hyper inflates. In February

2007, Zimbabwe’s inflation rate topped 50% per month, the minimum rate

required to qualify as a hyperinflation (50% per month is equal to a 12,875% per

year). Since then, inflation has soared.

• Zimbabwe is facing a super RUNAWAY inflation i.e. 86.7 sextillions [

percent].

• In Zimbabwe the people have stopped the transaction in currency, in Zimbabwe

the barter system is running .that means the Zimbabwean dollar lost 99.97% of

its value. And that leads to create barter system.

• In Zimbabwe the prices of the products are getting double in every 1.3 days .It

means suppose if the price of an article is Zimbabwe$100 today it gets Z $200

dollar after 1.3 days.

• The supermarket in Zimbabwe already stopped the transaction in Zimbabwean

dollar, they accepts only South Africans RAND and US DOLLAR.

• The rates that are running in the Zimbabwe are:(1)Overnight 10,000%

(2)TN 91Days 66.33%

• The data under shows the inflation rate in Zimbabwe from January 2007 to

November 2008.

• Hyperinflation have droves the one we were dealing with look like a walk in the

park i.e. created a financial crisis. The latest figures put Zimbabwe’s annual

inflation rate at 516 quintillion percent i.e 516 followed by 18 zeros.

• Zimbabwe’s inflation crisis is now the 2nd worst inflation spike in history, behind

the hyperinflationary crisis of Hungary in 1946, in which prices doubled every 15-

6 hours. In September 2007, the exchange rate between the U.S. dollar and the

Zimbabwe Dollar was USD1 and ZWD253. The current exchange rate between



the U.S.dollar and the Zimbabwe dollar is USD1 to ZWD60,623. This is a

23,861% increase since then.

Hanke Hyperinflation Index for Zimbabwe (HHIZ)

Date IndexMonthly

Inflation RateAnnual Inflation Rate

5-Jan-07 1.00 13.70%

2-Feb-07 1.78 77.60%

2-Mar-07 3.14 76.70%

5-Apr-07 6.90 56.20%

4-May-07 6.75 -2.15%

1-Jun-07 20.70 207.00%

6-Jul-07 53.00 60.40%

3-Aug-07 49.10 -7.29%

7-Sep-07 82.50 70.60%

5-Oct-07 219.00 165.00%

2-Nov-07 642.00 193.00%

28-Dec-07 2,010.00 61.50% 215,000%

25-Jan-08 2,250.00 11.80%

29-Feb-08 8,260.00 259.00%

28-Mar-08 17,700.00 115.00%

25-Apr-08 57,100.00 222.00%

30-May-08 442,000.00 498.00%

26-Jun-08 23,600,000.00 5,250.00% 41,400,000%

4-Jul-08 49,200,000.00 3,740.00% 93,000,000%

11-Jul-08 81,800,000.00 2,080.00% 167,000,000%



18-Jul-08 122,000,000.00 1,030.00% 250,000,000%

25-Jul-08 157,000,000.00 566.00% 317,000,000%

29-Aug-08 6,330,000,000.00 3,190.00% 9,690,000,000%

26-Sep-08 794,000,000,000.00 12,400.00% 471,000,000,000%

3-Oct-08 3,570,000,000,000.00 15,400.00% 1,630,000,000,000%

10-Oct-08 32,300,000,000,000.00 45,900.00% 11,600,000,000,000%

17-Oct-08 1,070,000,000,000,000.00 493,000.00% 300,000,000,000,000%

24-Oct-08 124,000,000,000,000,000.00 15,600,000.00% 26,100,000,000,000,000%

31-Oct-0824,600,000,000,000,000,000.

00690,000,000.00

%3,840,000,000,000,000,000

%

7-Nov-08 4,890,000,000,000,000,000,000.00 15,200,000,000.00% 593,000,000,000,000,000,000%

• 14-Nov-

08 853,000,000,000,000,000,000

,000.00

79,600,000,000.

00%

89,700,000,000,000,000,000

,000%

• Sources: Imara Asset Management Zimbabwe and author’s calculations.



SUPPLY SHOCKS

It is generally assumed that movements in output and prices in the economy were

caused by shifts in the aggregate demand curve by changes in monetary and fiscal

policy and investment demand. But the macroeconomic story was largely story of

negative supply shocks.

A supply shock is a disturbance to the economy whose first impact is a shift inthe aggregate supply curve.

Rational expectations theory argues that the aggregate supply curve should shift

very quickly in response to anticipated changes in aggregate demand, so output

should change relatively little. The theory of aggregate supply is not yet settled.

Several explanations have been offered for the basic fact that labor market does notadjust quickly to shifts in aggregate demand: the imperfect information market

clearing approach, coordination problems, efficiency wages and costs of price

changes and contracts and long term relationships between firms and workers.

Materials prices along with wages are determinants of costs and prices. Changes in

material prices are passed on as changes in prices and therefore as changes in real

wages. Materials price changes have been an important source of aggregate supply

shocks.

Supply shocks pose a difficult problem for macroeconomic policy. They can be

accommodated through an expansionary aggregate demand policy with increased



prices but stable output. Alternatively, they can be offset through a deflationary

aggregate demand policy with prices remaining stable but with lower output.

Type of inflation that is in Zimbabwe :( fromSupply side)

We all know that INFLATION means when there is more money supply in themarket that leads to increase the income of the consumer and that leads to high

demand and this made the rise in price.

In recent era, the inflation in Zimbabwe is because of less of supply .now the

question is that there is no money supply in the Zimbabwe, then then how

demand has increased.

Zimbabwe has violated many rules and guidelines which were given by IMF, and

World Bank .Zimbabwe has also misuse the fund that was funded by USA and



other countries. So there is no money supply in the economy, and country have

dearth of resources to produce, but how inflation is rising? The answer is, the

demand in Zimbabwe is stagnant but the supply has reduced, so this created a

massive inflation in Zimbabwe.

DEMAN

D

SUPPL

Y

10 6

10 5

10 4

10 3



This graph shows that demand pulling the price up. So the Zimbabwe is suffering

from this kind of unique inflation.



Reasons for such a high inflation rate

• The source of Zimbabwe's hyperinflation is the Reserve Bank of Zimbabwe's

money machine. The government spends, and the RBZ finances the spending by

printing money. The RBZ has no ability in practice to resist the government's

demands for cash. Accordingly, the RBZ cannot hope to regain credibility any

time soon. To stop hyperinflation, Zimbabwe needs to immediately adopt a

different monetary system.

• The current crisis stems from crucial decisions taken by President Mugabe.

• In 1997 in order to quell unrest he awarded large, unbudgeted, payments to

veterans of the independence war.

• His policy of farm acquisition without compensating their white owners alienated

many in the international community, and the decision to send troops to the

Democratic Republic of the Congo (DRC) is a severe financial drain.

• President Robert Mugabe's campaign rhetoric about nationalizing the country's

other big income-earner, the mining industry, caused some companies to

threaten to pull out altogether and has had an unquantifiable effect in scaring off

desperately needed inward foreign investment.

• Lack of funding from Western world, IMF and World Bank.

• Carelessly spend money by government, and Reserve Bank of Zimbabwe (RBZ)

printing the money and supply that money in the market.



• The source of Zimbabwe's hyperinflation is the Reserve Bank of Zimbabwe's

money machine. The government spends, and the RBZ finances the spending by

printing money.

• The RBZ has no ability in practice to resist the government's demands for cash.

Accordingly, the RBZ cannot hope to regain credibility any time soon. To stop

hyperinflation, Zimbabwe needs to immediately adopt a different monetary

system.

How the money supplies in hyperinflation effectthe economy??

There was an opinion that one way in which the problem of scarcity could be solved is

by the pumping more money into the economy. In fact it would be very easy for

government to print money and give some to every individual .However this would be a

futile exercise since the problem is one of scarcity of goods and services and not of

scarcity of money.

Under condition of RUNAWAY inflation prices rise ten or hundred fold in a single

month. Did such increase in the money supply solve the problem of scarcity? The

answer is “No”. Most of the people become poorer during the time of RUNAWAY

inflation ,because if government increase the money supply , then buying power of

people gets increased and in the same way demand is also gets increase ,but the

resources are limited so this again increase the prices and leads to serious inflation.

Hyperinflation is a cradle-to-grave experience. The government announced that the the

price of childbirth is $ 7 million and would rise to 463% by October 2008. Funeral would

also cost double over the same period.



HUGE RISE IN ZIMBABWE INFLATION

Zimbabwe’s rate of inflation surged to 3,731.9% driven by higher energy and food costs

and amplified by a drop in its currency. April’s inflation rate jumped to 2200% recorded.

The analysts claim that four out of five Zimbabweans live below the bread line.

The announcement came after Zimbabwe’s government created a commission charged

with finding a way to curb the country’s spiraling cost of living. Due to this, there is high

unemployment and shortage of fuel and food across the nation.

Price increases to ‘worsen’

The surging cost of domestic electricity, food, fuel and commuter transport fares were at

the heart of price surges. Economists believe that these price increased would continue

because Zimbabwe will be forced to import maize, a basic food staple should make up

for a lack of home-grown produce.

The government has also recently warned of shortages of bread and flour which caused

more hardship.

Economic crisis



Rampant inflation is a clear sign of a deep economic crisis. Critics have blamed

President Robert Mugabe’s policies particularly the seizure of white-owned farms for

damaging the once self sufficient country was described as the bread basket of Africa.

President Mugabe, has accused foreign governments of trying to sabotage Zimbabwe’s

economy and topple him.

Recommended solutions

• “Dollarization" — replacing the discredited Zimbabwe dollar with a foreign

currency, such as the US dollar or the rand.

• The second is a currency board. Under such a system, the Zimbabwe dollar

would be credible because it would be fully backed by a foreign reserve currency

and would be freely convertible into the reserve currency at a fixed rate on

demand.

• Free banking — allowing commercial banks to issue their own private notes and

other liabilities with minimum government regulation.

Any one of these systems, or a combination of them, could be implemented

immediately, without preconditions, and would therefore quickly put an end to

hyperinflation and produce stable money.

• The government needs to add another currency, like US$, as legal

tender. If you were a shopkeeper in Zimbabwe, or a farmer across the

border thinking about exporting goods to relieve the chronic shortages,

would you really accept payment in Z$ that will be worthless before you

get to the bank? The external currency as legal tender will help ease

people's pain while the Z$ stabilizes.



• In a country run by a brutal dictator, it is tough to make policy changes

that diminish the power of the government and empower the free

market. The solution is really for Mugabe to be removed from power.

• Harborne reiterated the importance of "a political breakthrough" and

outlined steps that could be taken to encourage meaningful economic

reform in Zimbabwe. These include designing a clearance mechanism

to address the massive debt amassed by the Mugabe regime,

developing a comprehensive strategy and mobilizing external

resources to help finance reform and provide social safety nets



CONCLUSION

Mr.Robertson, the economist says that is unlikely, Zimbabweans can and probably will

endure greater hardship, he says. As a whole, the nation has only now sunk to

standards common elsewhere in Africa. But the governments have reached its limit.

Cutting spending seems impossible and raising taxes further is unthinkable.

Much more inflation is going to be printing its way out of its current difficulty.

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