Inflation, Zimbabwe Style

With two important reports on inflation due later this week, a look at some recent developments in Zimbabwe might be useful, just to put rising prices in the U.S. into better perspective - to see what the worst case scenario might look like.

As you'll recall, Zimbabwe is a South African nation currently experiencing "hyperinflation". According to Wikipedia, after hundreds of millions of dollars were spent on a recent war and efforts to develop a market-oriented economy were abandoned, inflation has skyrocketed from an annual rate of 32 percent in 1998 to a high of 1,730 percent just last week.

With an unemployment rate of 80 percent, President Robert Mugabe blames foreign governments for meddling, while the international community argues that the country's difficulties stem from Mugabe's controversial program to seize land from white farmers.

For ordinary citizens, the turmoil has real consequences.

Late last month came word that life for young Nelson Banya is full of challenges, not the least of which is figuring out how much things will cost with each new day. Not to be confused with The Economist's Big Mac Index (where, curiously, the Zimbabwe currency does not appear) Nelson finds a "Lunchbox Index" to be a useful indicator of declining purchasing power.

Last August, when the central bank introduced new banknotes, having lopped off three zeros, 1,000 Zimbabwe dollars could provide a decent packed sandwich; a couple of slices of bread, some eggs and even a slice of ham on good days.

Now 1,000 Zimbabwe dollars will buy only two eggs. Bread, which cost about 250 dollars 12 months ago, now costs 1,000 dollars.

Cash machines have stopped dispensing 1,000 dollar bills and now issue 10,000 dollar notes.

The bundles of banknotes keep growing. Where 100,000 dollars would go a long way in meeting my grocery needs for a month last August, I need five times that amount now.

Amid high unemployment, demand appears to be strong for one job - grocery store clerk. It seems that changing prices tags on a daily basis keeps many of them from restocking shelves.

In this story from earlier this month, the government announced that new bills were being put into circulation to help combat the inflation.

Zimbabwe's central bank introduced two new bank notes on Thursday as it battles a four figure rate of inflation that is rapidly eroding the value of the local currency.

The new 50,000 dollar note, worth around 200 US dollars, and the 5,000 bill are the latest additions to a series of temporary notes that were introduced three years ago to ease critical cash shortages.


The temporary notes are only valid for a short period of time. The current ones expire in July.

The central bank said in an advert placed in the local press that it was "introducing the new 5,000-dollar and 50,000-dollar bearer cheques from March 1, 2007 for your convenience."

Lopping off zeros from the currency failed to achieve the desired objective of halting price increases. Similarly, issuing larger denomination notes helped to alleviate back strain while lugging around cash, but has no other discernible impact.

A two month strike by doctors recently came to a peaceful conclusion. This report from the LA Times details how the government reached a deal with doctors, nurses and paramedics to boost their wages to help them keep up.

Government doctors stopped work in December, demanding an 8,000% wage increase, with the government offering a 300% hike.

Before the strike, state doctors earned currency worth about $224 at the official exchange rate but about $7 on the black market.

The president of the Hospital Doctors Assn., Kuda Nyamutukwa, confirmed that doctors had agreed a pay deal with the government but declined to give details of the new wages.
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Analysts have warned that rising discontent over the economic meltdown in Zimbabwe could trigger street protests against Mugabe's government.

Well, it's probably going to get worse than just street protests.

Yesterday, The Economist reported that those opposing Mr. Mugabe are being tortured and beaten as the economy "sinks deeper into the mud".

Throughout all of this, the Reserve Bank of Zimbabwe continues to operate. Their website appears to be in working order and reports are available to get a better feel for how monetary policy is being conducted.

In fact, the central bank recently released their semi-annual monetary policy statement that anyone can download and have a look at. Here's one of the more interesting charts.

Annual Inflation Profile (Jan. 04 - Dec. 06)

The report is an interesting read. Bankers state their current condition in a very matter-of-fact way, discussing the challenges ahead and ways that progress can be made.

Some are predicting that inflation will get worse before it gets better - 4,000 percent is the figure now frequently mentioned.