Zimbabwe: A Country In Crisis

1. Zimbabwe: A Country In Crisis

2. Outline • Brief History of Leadership • How Policy Started The Crisis • Recent Economic Performance • Hyperinflation • Recommendations • Conclusion

3. Zimbabwe’s Leadership • 1980: Robert Mugabe becomes head of Zimbabwe’s government • 1987: Named Executive President • Reelected in 1990, 1996, 2002

4. How Policy Started The Crisis: Land Reforms • February 2000: Zimbabwe voted on a referendum for a new constitution that allowed seizure of white-owned land for redistribution to black farmers, without any compensation (no Kaldor Hicks here) • Referendum DEFEATED by the people • Mugabe: “I will abide by the will of the people” • April 2000: land reform amendment pushed through by parliament • Immediately: land began to be seized

5. Africa’s Former Breadbasketis Empty • In wake of land reforms, agricultural production plummeted • Zimbabwe now depends on help from other countries to feed its people • Tax revenues fell sharply, lowering government income and increasing debt

6. Recent Macroeconomic Performance • Unemployment • 2005: Unemployment estimated at 80 percent of the labor force • Continues today and is likely to worsen as economy becomes even more unstable • Zimbabwe ranks as the 197th worst country for unemployment out of 200 countries total

7. Ten Worst Countries for Unemployment

8. Recent Macroeconomic Performance • GDP • 1960 to 1998: overall growth in GDP • 1998 to 2005: GDP fell consistently • $8.3 billion in 1998 • $5.5 billion in 2005 • 1998 to 2005: Per capita GDP also fell • $675 in 1998 • $422 in 2005 • Still dropping

10. Recent Macroeconomic Performance • Debt • 2006: estimated at 108.4 percent of GDP • External debt, owed in foreign currencies, is $5.26 billion. • Major decrease in tax revenue due to massive losses in the previously dominant agricultural sector

11. Recent Macroeconomic Performance • Money Supply • Huge increases are responsible for hyperinflation • Reserve Bank of Zimbabwe (RBZ) began printing enormous sums of money to finance increases in spending and meet debt obligations • In the last 5 years, money supply increased by over 820 percent • Demand for foreign currencies is high since Zimbabwean dollar has lost nearly all value

13. Recent Macroeconomic Performance • Interest Rates • Distortionary macroeconomic policy keeps interest rates from being market-determined • Prior to 2004, kept at or below 100 percent • However, inflation had reached over 600 percent by then, so keeping the nominal interest rates around 100 percent led to negative real interest rates of up to 500 percent. • Reserve Bank of Zimbabwe governor Gideon Gono increased interest rate to curb inflation • October 2006: lending rate set at 500 percent • May have been hiked as high as 785 percent in March 2006 • Result: stifled economic growth. Potential domestic investors cannot afford to borrow funds. Also, debtors cannot pay amounts owed, which generates significant losses for banks.

14. Recent Macroeconomic Performance • Parallel Markets • Zimbabwe’s official exchange rate is very different from the informal market exchange rate, which its citizens actually face. • Currency Devaluation • Since money supply increase, exchange rate has fallen dramatically • 2003 exchange rate: 0.824 Zimbabwean dollars (ZWD) for one US dollar • July 2006 OFFICIAL exchange rate: 250 ZWD per US dollar, pegged to US dollar • July 2006 NON-OFFICIAL exchange rate: 5,000 ZWD per USD

15. Recent Macroeconomic Performance • Currency Revaluation • In August 2006, central bank both redenominated and revalued the Zimbabwean dollar • 1,000 old ZWD = 1 new ZWD • Bank also devalued the foreign exchange rate of ZWD by 60 percent to the US dollar • More convenient for consumers to carry less paper, but system of pricing is still based on informal market • Policy changes will have little to no effect on Zimbabweans

16. Recent Macroeconomic Performance • Inflation • The single biggest problem in Zimbabwe • Historically high rates • 1998 inflation began to spiral out of control mains the single biggest problem in Zimbabwe. • 1996 to 2006: Prices have grown at an average rate of 132.6 percent • 2006: Prices reached 1000s of percents • April 2007: rates projected to exceed 2500 percent by end of the month

18. Major Problem #1: Hyperinflation • Quantity theory of money says we need some growth in money supply to support growth in production. Just not this much. • Government’s policy worsens things: • Regulation of exchange rates and interest rates within certain ranges (so never reach real market values) • Price controls and ‘official’ exchange rates don’t keep pace with devaluing ZWD, so people use South African Rand, Euro, and USD for informal market transactions • Hyperinflation amplifies all the customary costs of inflation • menu costs, resource allocation inefficiencies, and destabilization caused by constantly changing prices and black markets

19. Major Problem #2

20. Recommendation One:Curb Inflation • Under current hyperinflation, any attempts at stabilization are likely to be completely ineffective • Increase money supply  hyperinflation • Contract money supply  back to normal

21. Short Term EffectsAre Painful (But Necessary) • Sticky short run prices mean contracting M will change domestic interest rates and output (IS-LM model) • Money supply curve shifts to the left; money demand constant • Nominal and real interest rates increase • However, expectations for inflation will remain high, so nominal increases more than real • LM curve will shift to the left, resulting in lower overall output (holding expenditures constant) • This will be difficult for Zimbabwe, since output is already so low • As output falls, unemployment increases • Contract until domestic interest rate = world interest rate to promote equilibrium between the current and capital accounts.

22. IS-LM Model

23. Long Term Effects: Back to Normal • Unemployment increase due to drops in output are short term • In the long run, output will be restored to pre-contraction levels as price stabilizes (Classical Model) • As money supply decreases, aggregate demand will fall, shifting the curve down and to the left • New equilibrium will be established at a lower price level, where aggregate demand equals long-run supply

24. Long Run Aggregate Supply Model

25. Recommendation Two:Repair Relationships with Everyone • Zimbabwe has been in arrears with the International Monetary Fund (IMF) since early 2001 • February 2007: IMF review resulted in continued suspension of financial support and Zimbabwe’s voting rights • Need to follow comprehensive IMF/WB suggestions for economic stabilization • Also need to fix rifts with neighbors: Zimbabwe needs help during reforms to keep order and to provide humanitarian aid to its people • The soured relationship between now isolated Zimbabwe and the international community needs repairing for Zimbabwe to have any hope of full and long-term recovery

26. Unofficial Recommendation Three: Oust Mugabe

27. Conclusion • Zimbabwe is in a state of total macroeconomic disrepair BUT • All hope is not lost • Need to curb inflation • Get leadership that is serious about recovery