Published by the government of Zimbabwe
Jeffrey Gogo
22 August 2008
opinion
Harare — DESPITE accelerating food and service prices, Zimbabwe's annual rate of inflation is yet to claim number one spot in modern world history.
Annual inflation came in at 11,2 million percent at the end of July, according to latest statistics from the Central Statistical Office. It has risen from a low of 124 percent in January 2004. Monthly inflation is running at slightly below 900 percent.
While the figures are unsustainably high, research shows that Zimbabwe may be able to shake off the hyper-inflationary tag within a few years.
A tough monetary policy, a balanced blend of economics and politics, as well as increased production will be key to achieving macro-economic stability.
History proves that several European and South American countries have been in far worse off situations before, but managed to recover to become some of the leading economies in the world today.
For Zimbabwe, there is nothing wrong with cutting off zeros from the local unit, as many times as possible until the intended results are achieved.
Some of the South American and Scandinavian countries were forced to cut zeros several times during the 20th century before their economies stabilised. Most needed repeated currency reforms to achieve stability.
What is inflation?
Generally, inflation can be described as the rate of increase in the price level. When prices rise, there is inflation. If inflation is not compensated by nominal increases of income, people become poorer.
High and variable inflation makes economic price predictions and decision-making difficult. Extremely high inflation warrant too much attention from policy makers and the general public, which distracts them from more crucial tasks.
But the Zimbabwe situation is not just ordinary inflation; it is hyperinflation. Hyperinflation is the most extreme inflation circumstance with yearly price increases of triple digit percentage points and an explosive acceleration, according to online definitions.
World's highest inflations
Hungary (1922, 1946) -- Hungary went through two hyperinflation periods. From 1922 to 1924, the annual inflation in Hungary peaked at 98 percent but things took a nasty turn after the Second World War when the rate of inflation reached 4,19 quintillion percent mid-1946. This is one of the worst inflation rates in modern day history.
At this rate, prices doubled every 15 hours. The Hungarian National Bank had the incredulous honour of circulating the largest denomination banknote that being 100 quintillion pengo.
Yugoslavia (1993-1994) -- Monthly inflation in Yugoslavia touched a high of 5 quintillion percent in 1993, also after the end of the Cold War in 1990. There were conflicts of governance in the country at the time as well. Between October 1993 and January 1994, prices in Yugoslavia doubled every sixteen hours on average.
Greece (1944-1953) --During the German occupation of Greece (1941-44), the monthly rate of inflation in Greece reached 8,6 billion percent. Prices doubled every 28 hours. In 1943, the highest denomination was 25 000 drachmai. By 1944, the highest denomination was 100 trillion drachamai.
Greece slashed zeros more than two times and failed to deal with effects of high inflation.
German (1923) -- German had borrowed to finance the First World War hoping that losers will repay the loans. However, the country was forced to pay heavily in reparations after losing the war. In that year, monthly rate of inflation reached 3,25 billion percent, equivalent to prices doubling every 49 hours.
People were using bank notes to fire up their stoves and one needed a wheelbarrow full of cash to purchase a loaf of bread.
Also, Zimbabwe's inflation is a distant far from Serbia's monthly 309 million percent reported in 1992, when the country was at war. Currency reforms also failed to work in Serbia.
In China annual inflation reached 11,2 million percent between 1947 and 1949 and was forced to perform a variety of currency reforms to ease the impact of hyperinflation.
Countries that have also gone through a phase of hyperinflation include Angola, Argentina, Israel, the US, England and Brazil.
Taming inflation
It needed concerted efforts of economic and behavioural reforms for these economies to achieve stability.
Research has shown that the provision of domestic and foreign credits for governments budged finance has no statistically significant effects on the success of currency reforms.
Instead "independence of the central bank and the adoption of a credibly fixed exchange rate are crucial for the success of a currency reform," according to a recent paper by the University of Basel. The paper is titled: "The Success of Currency Reforms to End Great Inflations: An Empirical Analysis of 34 High Inflations".
Here, central bank governor, Dr Gideon Gono has proposed the freezing of prices and incomes for a period of up to six months, as the first step towards cooling inflation.
The central bank chief said this must be done in the spirit of the social contract, and immediately followed by comprehensive policies targeted at achieving macro-economic stability.
With the correct policies in place, history shows that there is still hope for Zimbabwe's economic recovery.
Sections of the research in this story are attributed to goldnews.bullionvault.com.
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