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Zimbabwe's Currency Crisis

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Zimbabwe's Currency Crisis Munich Personal RePEc Archive Zimbabwe’s Currency Crisis: Which Currency To Adopt In The Aftermath Of The Multi-Currency Regime? Makochekanwa, Albert 28 December 2009 Online at https://mpra.ub.uni-muenchen.de/22463/ MPRA Paper No. 22463, posted 04 May 2010 06:00 UTC ZIMBABWE‘S CURRENCY CRISIS: WHICH CURRENCY TO ADOPT IN THE AFTERMATH OF THE MULTI-CURRENCY REGIME? By MAKOCHEKANWA ALBERT PHD IN ECONOMICS FINALIST UNIVERSITY OF PRETORIA SOUTH AFRICA Email: [email protected]. %eywords: Multi,currency. yperinflation, dollari1ation, currency 2oard, free 2anking 4EL classification: F31, F32, F33, F34, F41, F43 1 Abst act The study presented main features of possi2le currency options which can 2e potentially adopted 2y 7im2a2we in the aftermath of multi,currency regime. The currency options analy1ed are dollari1ation, 8oining the CMA and re,introduction of the 7im2a2we dollar 97:). The proposed management systems to underpin the reintroduction of the 7im2a2wean dollar are currency 2oard, free 2anking and Reserve Bank of 7im2a2we 9RB7). For each of the options analy1ed, the practicality of 7im2a2we in adopting and/or implementing such currency was also explained. Although any of the three options could 2e adopted and implemented, the study considered the options in the following descending order of priority: 9i) dollari1ation, 9ii) retaining the 7$ 2ut under the management system of a currency 2oard, 9iii) 4oining the CMA, 9iv) retaining the 7: under the management of RB7, with the institution having new management, and lastly 9v) free 2anking. 2 1 INTRODUCTION 7im2a2we@s severe and chaotic yperinflation trend in the new millennium and especially from the year 2000 to end of 4anuary 2009 led the country to voluntarily a2andon one of its sovereign sym2ols, its monetary currency, the 7im2a2wean dollar 97:) 2y adopting the use of other foreign currencies as means of payments, unit of account, store of value and standard of deferred payments. Latest yperinflation rate figures released 2y 7im2a2we@s Central Statistical Office 9CSO)1 was that of 4uly 2008 in which the country@s mont ,on-month rate was estimated at 231.2 million percent, while the International Monetary Fund 9IMF)2 estimates the yperinflation rate to 2e 489 2illion as of Septem2er 2008. On the other and, independent analysts, for instance, Steve Hanke 92008)3 put this inflation rate at 6.5 quindecillion novemdecillion percent 9that is 65 followed 2y 107 1eros) as of Decem2er 2008. In comparison with other countries, the second highest inflation rated country in Septem2er 2008 was Burma. whose inflation rate was around 39 percent4. Relative and in comparison to other African countries in general, and Southern African Development Community 9SADC) countries in particular, where the average annual inflation since 2000 has 2een 2elow 20 percent. 7im2a2we@s inflation rate was 2y far an extreme outlier. The country has 2een ravaged 2y yperinflation for a considera2le period to such an extent that the value of the local currency, t e 7im2a2wean dollar 97$), has 2een estimated to have lost more than 99.99 percent of its value within a space of less than two years alone, 2etween 2007 and 2008 9Hanke, 2008). On the local scene, the 7im2a2wean dollar 97$) as 2een playing second fiddle to other currencies suc as US dollar 9US$). the South African rand 97AR). the Euro and British pound, to mention 8ust a few credi2le currencies that were widely used in almost all transactions. The use of these currencies gained ascendancy as far 2ack as 2006, although their wide scale use started 2eginning of 2008 across the 2oard with even rural people selling their livestock in US: and ZAR. A com2ination of yperinflation and central 2ank's monopoly over t e production of currency over t e past two or so years as forced the 7im2a2wean citi1ens to use the government issued currency under duress with no recourse for the populace over their dissatisfaction with the currencyFs value. During yperinflation period 92000 œ 2009 94anuary), 7im2a2weans felt the 2itter 2rute as they have had to cope with recurrent currency transitions from denomination notes of 7$5, 7$10 and 7$20 maxims 9at independence in 1980) to a currency whose denominations has rapidly shifted from thousands, to millions, to 2illions, to trillions, to quadrillion, to hextillion, and ended at 1 CSO if t e collector and custodian of t e country@s formal statistics on socio,economic issues 2 International monetary Fund 9IMF) 9200A). Preliminary Conclusions of t e IMF Article IV Consultation Mission 9Facsimile addressed to 7im2a2we@s Minister of Finance. 23 Marc 200A) 3 Steve H. Hanke is a Professor of Applied Economics t e 4o ns Hopkins University in Baltimore. He as written extensively in monetary issues including dollari1ation and currency 2oards in general and as also written a num2er of 2riefs and papers in particular on 7im2a2we@s yperinflation scenario 4 Hanke Steve 92008). 7im2a2we: From yperinflation to Hrowt . Cato Institute 9Centre for Hlo2al Li2erty and Prosperity Development Policy Analysis). 3 octillion5 2y end of 4anuary 2009C. The presence of 2oth semi and informal dollari1ation have forced the government to allow use of multiple currencies such as t e South African rand, British pound, Botswana pula and the euro7 and this policy was pronounced during the presentation of the countryFs 2009 national 2udget on 30 4anuary 200A8. At first, the government insisted that the 7$ should remain the legal tender alongside other currencies. However, due to worthless and total loss of confidence in the 7$ 2y t e ma8ority, the government latter suspended the 7: from t e market, initial for twelve months and then latter for another three years. Although the country will continue to use the multi,currency regime until end of 2012, questions still remain as to what will 2e the 2est option currency to adopt after this regime. This study therefore intends to provide a critique of some of the possi2le currency options that the country may consider adopting. 1.1 Zimbabwe‘s hype inflationary t end Hyperinflation is considered as inflation out of control, a condition in which prices increase rapidly as local currency loss its value. Cagan 91956:25) defines I yperinflation as 2eginning in the month the rise in price exceeds 50 percent and as ending in the mont 2efore the monthly rise in prices drops 2elow that amount and stays 2elow for at least a yearJ. The history of yperinflation in 7im2a2we can 2e said to date 2ack to early 1999. Although data from CSO shows that the country@s monthly inflation rate reached the 50 per cent mark in Fe2ruary 1999, this monthly rate was a2ove 100 per cent 2y Novem2er 2001 2efore 8umping to rates higher than 200 per cent 2y 4anuary 2003. By the Decem2er 2003, the rate was squarely at 600 per cent, though it temporarily declined through 2004 and 2005, reaching the trough of 124 per cent in March 2005. Since April 2006, the monthly rate has 2een a2ove 1000 percent, with the upward trend reaching 2200.2 per cent in Marc 2007. This inflation rate was estimated at 231.2 million percent 2y end of 4uly 2008 9CSO) with IMF@s 92009) estimates putting the yperinflation rate to 2e 489 2illion percent as of Septem2er 2008. This yperinflation trend and other economic indicators are depicted in Ta2le 1. 5 7im2a2we@s ig est money denomination in 4anuary 200A was 7:100 trillion. Adding 2ack t e 13 1eros 7im2a2weFs central 2ank as lopped off since August 200C 93 1eros were c opped off on August 1st 200C and furt er 10 1eros were c opped off on August 1st 2008) as a means of trying to make t e countryFs currency somew at more managea2le. totally 1eros will 2e 27. T us in actual fact. t e country@s ig est domination was 1 octillion 2y end of 4anuary 2010. C One million as six 1eros. one trillion as 12 1eros. one extillion as 21 1erosK one octillion as 27 1eros. one nonillion as 30 1eros w ile one decillion as 33 1eros. 7 It is important to note t at t e country@s use of multiple currencies is not legal or formal dollari1ation from t e government of 7im2a2we@s point of view as pointed 2y RB7 governor. T e Herald Newspaper 918 August 200A). IReintroduce 7im dollar: LRB7 governorMJ. Availa2le at: ttp://www1. erald.co.1w/inside.aspxNsectidO8782PcatO1 8 Availa2le at: ttp://www.ku2atana.net/docs/econ/min_fin_2udget_200A_0A012A.pdf. 4 Table 1: Zimbabwe‘s economic pe f. mance Year GDP GDP pe capita Annual Inflation US$ billions 2 G owth US1 % 1980-1998 7.0 3.9 740.4 20.5 1999 6.0 ,3.6 508 56.9 2000 5.7 ,7.3 489 55.2 2001 5.7 ,2.7 490 112.1 2002 5.6 ,4.4 478 198.9 2003 5.1 ,10.4 433 598.7 2004 5.0 ,3.6 430 132.7 2005 5.0 ,4.0 427 585.8 2006 4.9 ,5.4 417 1,281.1 2007 4.7 ,6.1 403 108,844.1 2008 3.2 ,14.1 265a 489,000,000,000b Sou ces: IMF online data2ase ”a‘: Government of 7im2a2we@s916 July 2009). Mid Year Fiscal Policy Statement ”b‘: IMF 92009) Factors which have 2een among the ma8or causes of yperinflation in 7im2a2we includes money printing 9seigniorage), foreign currency s ortages 9with its resultant 2lack market premium), demand pull,inflation 9due to disrupted production activities, especially in the agricultural sector), and imported/cost,push inflation (Makochekanwa, 2007). Rith respect to money printing, the 7im2a2wean government as 2een good at using t e money machine print.
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