Hey guys! The following blog will give you a glimpse into the current economic condition of Zimbabwe and the financial crisis it suffered in the year 2008. Hope you like it and gain some insight.

ABOUT

Zimbabwe is a country in Africa. It is known for its dramatic landscape and diverse wildlife, much of it within parks, reserves and safari areas. Cyclone Idai has worsened the situation in three key provinces that typically account for 30% of the agricultural output. The drought has led also led to broader impact on the electricity and water sectors, causing widespread rationing and tariff adjustments to manage costs. The government mandated the use of the Zimbabwe dollar as a sole tender on the June 24, ending the multicurrency regime in place for over a decade. However, the local currency has continued to depreciate due to critically low levels of official reserves, constrained access to external financing and limited tools by Central Bank to sterilize the economy. 

CURRENT ECONOMIC CONDITIONS

The fiscal deficit is projected at around 4.9% of GDP in 2019 and will gradually decrease to 4.5% and 4.4% of GDP in 2020 and 2021 respectively. The budget presented August 1, 2019, predicts a significant increase in spending to counter the negative impacts of the drought, upward adjustment of wages, and increase in social spending. 

It is estimated that poverty will rise from 29% (2018) to 34% (2019) due to the increase of people from 4.7 to 5.7 million people. Poverty is projected to remain stagnant in 2020 as the negative effects of continuous high inflation the cancel the positive impacts of a recoil in agricultural production, further undermining the purchasing power of the poor. Continued cash will continue to constrain social programs and the impact on poverty. 

In the absence of international support, Zimbabwe macroeconomic challenges may persist. With deteriorating reserves, there is a high-risk of exchange rate overshooting, contributing to inflationary pressures. Climate related risks may put pressure on the recovery of the agriculture sector in the medium-term worsening food insecurity. Social and political pressures could lead to policy slippage, delay macroeconomic stabilization and political reforms. 

Today, 35 quadrillion (35,000,000,000,000,000) Zimbabwean dollars are equal to just US$1.

Gross Domestic Product (GDP)

As you can see from the above graphical representation of the GDP of the past 15 years of the country Zimbabwe, from year 2008, the GDP of the country has really started to boost up from4.416 billion in 2008 to 9.666 billion in 2009 and still growing gradually. 

The current GDP of Zimbabwe is 31.001 billion dollars. The real GDP is expected to come down by 7.5% in 2019. Shortages of foreign currency, fuel, electricity, severe drought and Cyclone Idai dampened economic activity, especially in mining and agriculture, which experienced double-digit declines. The production of maize, the main staple food, was less than half of its level in 2018, resulting in wide-spread food insecurity. Domestic demand has decreased drastically due to the high level of unemployment level in the country and also because the increasing inflation level which is eroding the disposable income of households while fiscal severity kept government spending low. 

GDP GROWTH

The GDP growth rate measures how fast the economy is growing. It does this by comparing one quarter of the country’s gross domestic product to the previous quarter. The GDP growth rate indicates how fast or slow the economy is growing or shrinking.

In Zimbabwe, the real GDP growth is projected to pick up to 2.7% in 2020, driven by a rebound in agricultural as rains largely return to normal. 

INFLATION

From the above graph, we can see the GDP deflator method of calculating inflation from the year 2004 to 2017. From the graph we can see that, from the year 2008 to almost 2009, the country suffered from hyperinflation. 

GDP deflator. The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100. Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices).

Hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies, often the US Dollar.

From the graph, you can see the trend of the inflation in the country from 2010 to 2017.

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

Zimbabwe suffered from extreme hyperinflation in the year 2008. Inflation has been increasing since October 2018 by monetization of sizable fiscal deficits of the past, price distortions, and local currency depreciation. Annual inflation reached 230% in July 2019), with food prices rising by 319% in July 2019 while non-food inflation increased by 194%.  Inflation is projected to continue increasing and to average close to 180% in 2019 before slowing down in 2020.

ECONOMIC CRASH IN THE YEAR 2008

Zimbabwe’s economy collapse is from one of the worst dictators in the region, Robert Mugabe, leading an extremely corrupt regime, a terrible land distribution program that has demolished food production, the Second Congo war and Mugabe’s involvement there, the U.S. sanctions to curtail Mugabe’s regime, and the regime’s desperate efforts to pull itself out of all this through printing money.

Over the past 35 year, there has been only one leader Zimbabwe and that is Mugabe. He has done whatever it takes to stay in power all these years. The country is among the world’s top 20 most corrupted nations, and Mugabe has been trying to stay in power by printing as much money as possible to survive himself.

In the 1990s, he introduced land reforms to take away land from the white landowners to distribute it to black Zimbabweans. Some of these new farmers had no experience in farming, and thus food production dropped by nearly half. Since 1998, he involved his country in the Second Congo War, further impoverishing the country. In reaction to all this, U.S. and Europe have imposed sanctions in early 2000s against the ruling elite and the farms connected to them. These sanctions were the last straw in the already struggle Zimbabwe economy. By 2008, Zimbabwe inflation was 89,700,000,000,000,000,000,000 percent as the regime keep trying to print its way out of the mess. 

STRATEGIES

One of the main ways the Zimbabwe government reduced the inflation was to stop printing anymore currency notes. A multicurrency system has been in operation ever since Zimbabwe stopped printing money in 2009, with the South African rand and US dollar in use since 2008 and the Chinese renminbi, Australian dollar, Japanese yen and Indian rupee joining the list of accepted currencies in 2014. Dollarization lowers inflation and interest rates and, if the country were healthy in other respects, could offshoot investment by providing a more stable financial environment and reduced transaction costs. But Zimbabwe’s failure to tackle core problems like lack of infrastructure, massive internal and external debts caused by rampant spending, political instability and endemic corruption, has spooked investors, and dollarization won’t solve these problems. Zimbabwe’s debt to the WBG is $1.5 billion, with 86% ($1.3 billion) of the debt in arrears. Mugabe blamed inflation on ‘Greedy businesses’ demanding price rises. This encouraged him to set up price controls.

In 2009, those foreign currencies were formally legalized and most businesses adopted the US dollar as their currency of choice. The government also tried to limit cash withdrawals from banks to 25 US cents a day. This resulted in the rapid growth of a black-market transactions in which Zimbabweans scoured to exchange their Zimbabwean dollars for USD. On several occasions, the Central Bank of Zimbabwe slashing three zeros off bills in 2006, then slashing 10 zeros in 2008. In 2009, when hyperinflation reached its peak, the Central Bank slashed 12 zeros off the dollar. Doing this may have made computations more manageable, but did little to slow inflation.

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