11 November 2008

Financial tsunami: a tale of deep recession and hyperinflation



The current global financial crisis, which is getting worse every passing day, has already been termed as a "financial tsunami" by many experts. 'Recession' and 'inflation', these days, are quite hot topics in the media. This post does not intend to discuss the global economic crisis in general; however, I am going to share the story of a country which has been facing an unprecedented level of inflation. It is the tale of a country that has the worst economy in the world: Zimbabwe. After collapse of the agriculture sector in Zimbabwe in 2000, the country plunged into deep recession and hyperinflation. Inflation in the country is still hitting a new high everyday. It has already skyrocketed to 231 million percent a year; unemployment rate has gone beyond 80% mark and almost one-third of the population has left the country! There is no shortage of superlatives to describe the state of the Zimbabwean economy.

Many of us have heard about the Zimbabwe's political crisis; but, I was stunned after knowing about the financial status of this African nation. Last week, one of my friend, Dr. Nabin Basnet, sent me an article regarding Zimbabwe's economic crisis. I found the article interesting (?), and hence, trying to re-write the story before sharing with all of you.

The term 'recession' means a decline in the state of the economy; a widespread decline in the GDP & employment and the trade lasting from six months to a year. Likewise, the term 'hyperinflation' means a rapid and unchecked increase in the price level. Typically it may involve inflation rates of greater than 100% or greater than 1000% Hyperinflation is often reported per month, or even per day. Another distinguishing feature of hyperinflation is the idea that inflation is out of control. i.e. not only are prices rising rapidly, but the rate of increase is rising rapidly as well. With each cycle inflation gets worse.

What causes hyperinflation? Usually, countries with hyperinflation have the following features (source)
  • Large government debt, usually over 100% of GDP
  • Printing Money. To cope with meeting the debt, the government starts printing money. This decreases the value of existing money creating a multiplier effect where people lose confidence in money and keep demanding wage increases.
  • Reluctance / inability to deal with it.
As the second point suggests, Zimbabwe started printing money in order to cope with meeting the debt. Please take a look of the following photos, that speaks for itself: (source). One 200000 dollar note (a change being accepted by the boy in picture below) equals less than $0.10 cents!

a new note of 500000 dollars introduced to the market! The government kept on printing money...


Then, a new note of 10 million dollars!

This mountain of cash is worth $100!

Then, 50 Million note was introduced!

Followed by a 250 million dollars note!

...a note of 500 million dollars!

And finally - a 100 billion dollars note!

You must be wondering about how much and what you can buy with this 100 billion dollars note. well, Probably, 3 eggs!

That's how people went to restaurants!

and a hotel bill...

Interestingly, at a bank in Harare, people have queued up to withdraw their nearly worthless savings! (photo courtesy: The New York Times)


Economists say that Zimbabwe’s economic collapse is gaining velocity. As the bankrupt government prints ever more money, inflation has gone wild, to a figure so high that the government had to eliminate 10 zeros off the currency in August to keep the nation’s calculators from being overwhelmed. Had it left the currency alone, $1 would now be worth about 10 trillion Zimbabwean dollars!


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7 Comments:

Anonymous said...

Do you know?
1)In 1980 in Zimbabwe US$1 was equal to ZW$1
2)In August 2006 there were 3 zeros removed from the Zimbabwe currency, that means that there are now 13 zeros removed in total
3)The banks have a “maximum withdrawal limit”, & the limit is barely enough to buy two loaves of bread (imagine if you need to buy household goods or do your weekly shopping)
4)People have now been reduced to eating wild roots and even dog meat
5)14 hour of daily Load shedding - the govt is now going around seeing who has a generator so they can be taxed with the new “generator tax” (or whatever its going to be called)
6)Daily water cuts, you should be lucky enough to get water for just few hours a day in the morning - this has lead to people digging open wells in desperation to get water, however this is untreated water, resulting in cholera outbreaks in the country
7)This is not a laughing matter, Zimbabwe is really burning and people are dying everyday

Dilip Acharya on November 13, 2008 at 8:18 AM said...

Oops!

It's really terrifying.........

I was literally stunned by reading your post.

Moreover, the comment of anonymous makes it extremely sensitive.

I hope Zimbabwe will get aid and supports from developed nations and other monitory institutions and organizations to overcome it.

Nabin said...

Thank U Deependra-ji for this post. I remember sharing the article with you.

The situation in Zimbabwe is worse than what we can imagine from outside.

I just read more about the country in BBC just now and hope you will allow me to put a link here:

http://news.bbc.co.uk/2/hi/africa/7714892.stm

We are lucky that our country despite failing in everything it has attempted is still not that bad though we really have not achieved anything we should have by now.

Alok said...

Though, the pictures look funny,situation in Zimbabwe seems to be extremely terrifying. I am really shocked by the remarks by 'Anonymous' that people have now been reduced to eating wild roots and even dog meat! It's embarrassing to entire world, specially, to the so called developed countries and donor agencies. The new article shared at the above comment (by Nabin) explains intensity of the present humanitarian tragedy in Zimbabwe. Thanks for the post.

DEEPENDRA on November 16, 2008 at 1:19 PM said...

I must agree with Dilip jee that situation in Zimbabwe seems to be terrifying. Thanks to 'Anonymous' friend for providing with details of the tragedy.
Nabin jee, thanks once again for sharing the latest article. Probably you are right when you say "...We are lucky that our country despite failing in everything it has attempted is still not that bad ..."
Dear Alok, I appreciate your opinion.

Basanta Gautam on November 20, 2008 at 8:20 AM said...

Nice analysis! From the heading, I had expected sth. about the current world financial crisis. But this peiece about Zimbabwe is timely too and immensely educative to a country like ours.

People all over the world have made great analysis on Zimbabwe's current plight. Facts boil down to a few points, like;

1)Dictatorship is always dictatorship no cover can hide it. and there is nothing called 'patriotic dictatorship'. Patriotism is misused by dictators to prolong their ruthless rein.
2)Power consolidated to one person (and his few cronies) even if he is a so called freedom-fighter or a national hero leads to doom and failure. So a healthy democracy with competitive socio-economic norms is the only option for any country.
3)'Land reform' for 'land reform', without any consideration for the productivity can only lead to famine. This point is very important for us, as there is now talk of land reform in our country too. Our country urgently needs some sort of land reform but if we follow the 'populist' model of 'grabbing and dividing' as in Zimbabwe, we are sure to land in the famine-zone.

Zimbabwe has become such a filed state, it is so sad to see a thriving country doomed. Lets hope our leaders will not take us towards that path.

DEEPENDRA on November 23, 2008 at 8:55 AM said...

Thanks Basantjee for your analytical thoughts on the Zimbabwe issue and it's relevance to our country. I wish to join you in your hope that our leaders will act rationally and refrain from opting a path that may lead to negative productivity.

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