Zimbabwe in crises

Bread Basket of Africa

UNEMPLOYMENT

AIDS

AIDS

REASONS THAT LED TO THE CRISIS

GDP

AGRICULTURE

60% Labor force

•Wheat•Tobacco

300,000 tons in 1990 to less than 50,000in 2007

Wheat Production

US$600 million in 2000 generated less than US$125 million in2007

TobaccoResponsible for 1/3rd exchange earnings

Economic Structural Adjustment Program (ESAP) failure:

•No foreign aid

•Local borrowings

•Restrictions on exchange earnings

• Price control policy(2007)

MANUFACTURING

Lowest ever coal production in 2006 since 1946

MINING

6,000 deposits25 tons gold annually

GOLD

•Victoria Falls

•Game reserves

•Stunning mountains

•Wonderful climate.

TOURISM

TOURISM

1/10

•Main source of income

•Informal sector share of employment grew to about 20percent in 1986 and to an estimated 40 percent in 2004. •Operation Murambatsvina

INFORMAL SECTOR

Out of control Loss of value

Characteristics

Non monetary asset Foreign currency

Fall in purchasing power

Credit purchases

Price index

How it happened

Confiscation of white-owned farmland Killing of other white farmers

Repudiation of debts to the International Monetary Fund

Why these factors caused hyperinflation

What else the government did?

Declared inflation illegal Freezing of wages

what is the best strategy forward to tackle this hyperinflation ?

• Linking of currency• Froze government spending• Stop printing currency• lifting all price controls• Deregulate their economy

ROLE OF RBZ

HYPER-INFLATION

DEMAND FOR CASH

PRINTING MONEY

DOLLARIZATION

CURRENCY BOARD

FREE BANKING SYSTEM

DOLLARIZATION• UNOFFICIAL

• SEMI OFFICIAL

• OFFICIAL

Characteristics of Dollarization

Imports Monetary Policy

Arbitrage keeps price low

Inflation etc. are low

Exp: Ecuador, El Salvador etc

OPTIONS AVAILABLE

FULLY CONVERTIBLE

HIGH CREDIBILITY

LOW AND STABLE INFLATION etc

Fully Convertible

High Credibility

Low and Stable Inflation etc

More Business with Europe

Largest Trading Partner

Large base of Expatriates

Unified Currency Zone

Exchange Controls

CURRENCY BOARDCurrency BoardNo role in monetary base

No Government Control

No Control on money Supply

Market Forces determine Money Supply

Fully backed by Foreign Reserve

Fully convertible at fixed rate

Exp: Argentina (1991-2002)

Acquire reserves for elasticity

Estonia (1992)Lithonia (1994)

FREE BANKING SYSTEM

• .

FREE BANKING SYSTEM

No Central Bank

No Lender of Last Resort

No Reserve requirements

No restrictions on Banks Portfolio’s rate

THANK YOU!!

Faraz KhanRoshan Sonthalia

Smriti GuptaStuti Gupta

FORE School of Management