No country has ever grown while suffering from hyperinflation; indeed,
every experience of hyperinflation has been accompanied by the kind of
economic collapse Zimbabwe is currently witnessing. In looking for a
cure, Zimbabwe can look to a surprisingly large number of countries
that historically experienced hyperinflation  eight from 1920-1946 and
16 since 1984. As a recent Brenthurst paper shows, in all countries the
cause was the same: hyperinflation was preceded by a long period of
very high inflation , followed by an event in which an already high
budget deficit suddenly increased sharply. An institutional ability to
use the central bank to print money to fund the large deficit caused
prices to spiral to ever-higher levels. In hyperinflation, government
tax revenue inevitably collapses as economic activity contracts.
Moreover, taxes are paid only monthly, quarterly or annually, by which
time hyperinflation has made their value virtually worthless. As a
result the deficit rises further, requiring the central bank to print
more money, which in turn drives hyperinflation ever higher in a cycle
of sky-high prices and economic collapse.
What makes Zimbabwe's experience of hyperinflation unusual is the
extraordinarily high level that hyperinflation has reached. At
231-million percent in July last year, Zimbabwe's hyperinflation has
been surpassed by only the Weimar Republic (Germany) in 1923 (where
prices doubled every two days) and Hungary in the aftermath of the
Second World War (prices doubled every 15 hours).
Zimbabwe's experience of hyperinflation is also unusual in that it has
now lasted for almost two years. Most other hyperinflations lasted only
a few months or maybe a year because the economic collapse that
accompanied hyperinflation brought about a swift change of government
or at least a U-turn on the policies that caused hyperinflation in the
first place. The price Zimbabwe has paid is that its economic collapse
has been especially severe.
To end hyperinflation, the budget deficit must be slashed â€â€
international experience suggests by at least 10% of gross domestic
product (GDP), but in Zimbabwe the fact that the true deficit may be
approaching an astonishing 80% of GDP suggests that the cut may have to
be much greater than this.
Second, the misuse of the central bank to fund the deficit by printing
money must be ended by removing the bank from government control. None
of this is easy, as reducing the deficit in a situation where tax
revenue has collapsed means slashing government spending (for which
read employment in the civil service) at a time of very high
unemployment and collapsed delivery of social services.
A third condition for ending hyperinflation is the establishment of
what economists call a nominal anchor  replacing a valueless local
currency with a yardstick against which future prices can be measured
and their rate of increase brought under control. Often this anchor has
been a fixed exchange rate or at least a crawling peg in which the
exchange rate depreciates at a slowing rate.
Adopting the rand as Zimbabwe's currency would provide such a peg. At
the same time it would prevent the Zimbabwe Reserve Bank from printing
money to fund the budget deficit as it cannot print rands. This in turn
will force the government to slash the deficit and hyperinflation will
indeed end. But such a solution is not workable in practice.
The Zimbabwean government has already taken the extraordinary step of
allowing local prices to be set in a range of currencies (including the
rand, dollar and pula). But the Zimbabwe dollar remains legal tender
and the reserve bank can continue to print these dollars for government
to pay its public servants, not least the army. If the rand becomes the
official currency, where will the Zimbabwean government get the rands
to pay its employees? In time, taxes will be paid in rands, but these
will not meet the current huge deficit of revenue versus spending. Such
a hole can be filled only if foreign aid is available. In the absence
of aid, SA would be called upon to supply the needed rands or face
possible unrest and the complete collapse of remaining public services
in its northern neighbour.
Adopting the rand can therefore happen only once the other ingredients
to end hyperinflation are in place. First there must be political
consensus on slashing the deficit as well as ending the central bank's
ability to fund future deficits. Only then will a nominal anchor be
effective. Most probably this should mean fixing the Zimbabwe dollar
exchange rate to the rand. Under such conditions, adopting the rand
itself will probably be no longer necessary.
Dr Keeton is in the department of economics and economic history at Rhodes University.
Post published in: Agriculture