Dollarisation: its impact, how did we survive?
|Written by BRIAN MACGARRY|
|Monday, 27 September 2010 17:07|
|The year 2009 began with Z$ inflation running at about 10,000%/month; i.e. currency adding 24 zeroes in a year. The ten zeroes lopped off in August 2008 were back and pressure to change to using the US$ increased from all sides. More employers were paying wages in US$, which were also accepted in payment of taxes, utility bills and in most shops. Mid-January saw the introduction of a trillion dollar note (12 zeroes) and 100% inflation in a day. A last-ditch effort, in February, to preserve a 'new' zimdollar' with the 12 zeroes lopped off, failed and reality was officially recognised. All payments could be made in any of five foreign currencies: rand, pula, pound, Euro and US dollar, with the US$ as the reference currency (i.e. when the rand rose against the dollar, Harare prices in rands dropped). In Harare, effectively only dollars and rands are used, but more people accept pulas in Bulawayo.
This ended hyperinflation overnight. We saw 'negative inflation' for most of the year. By December, the annual inflation rate was -7.7%. Table 1 compares wage data (from LEDRIZ) with cost of living figures (inflation, poverty datum line [PDL and food poverty line [FPL]. These figures are only rough approximations, the PDL being based on calculations of basic needs per head without allowing that different people have different needs, varying most notably with with age and gender and the 'average minimum wage' is a very rough approximation. PDL figures from the Consumer Council for November and December 2009 are included to illustrate this point. Nonetheless, we can safely say the purchasing power of an average minimum wage at least doubled over the year 2009, due to a combination of wage increases and price decreases.
Wage and cost of living comparisons.
But the only available figures since then look distinctly funny. LEDRIZ has some figures for the period up to May2010, which is no further behind than these statistics usually are, but I have to assume that their sudden jump in the average minimum wage to $410 is in fact a mistake for $140. This does not mean that the minimum wage has dropped. It may just mean they decided they cannot calculate the average minimum wage and more accurately than this. That means they are saying we can be sure it is between $135.01 and $145.00 but we can't be more exact than that. This is a reasonable thing to say, because an 'average minimum wage' is a very slippery concept. Since nobody knows how many workers are formally employed, it is easier to take the average of the known minimum wage for each sector of the economy. If each sector employed the same number of workers, this would give the same answer as taking an average of the wages of every worker. They are not all equal, so so the average minimum given here is not exact. We do not know how many workers there are in formal employment, so we cannot calculate the correct figure. What you have here is the best we've got.
Having said that, I take the liberty of using the November and December figure from the table above as the minimum wage up to May. This does state one truth: the average minimum wages in industry have not changed significantly since last November. They haven't increased noticeably (certainly not to $410, a 188% increase) and they didn't suddenly drop by $2.46 (1.7%) in January. Then the table above continues like this:
and since this has the virtue of matching our memory of what has happened to the money in our pockets since last January. This extended table says that in April we had slipped back to where we were late in June 2009. We will probably agree that we were slipping back. We have no better measure of how far or how fast we were slipping, so this is at least an expression of how we feel things were going.
There is another problem with the figures. Between January and February 2009 it is difficult to get continuity between figures in the incredible vanishing zimdollar and those in real money, whether you use US$, rand, pula or renminbi yuan. The change brought some sense back into the system. Our wages could buy something again. Beyond that, the figures are not clear. Could prices drop by 36% and wages rise by 47% when we simply translated both from Z$ to US$? That is one of the mysteries of hyperinflation economics I don't understand. Nor, I suspect, does anyone else.
What we do know is that we could once again plan how to spend our money. Our family budget made sense and that was an improvement. Let's just say we suddenly becameap better off; whether by 50% or 100% doesn't matter or mean much.
A very dubious figure in the table above is the "Food Poverty Line". Now, it should be possible to calculate the cost of feeding a family the minimum needed for survival: that would be a "Food Poverty Line". Unfortunately, the CSO don't think that way. They si,mply choose to call food costs 36.8% of the total "Poverty Datum Line". We know this is nonsense, because we know the poor spend more of their income on food than the rich do. CSO used to know this: in the pre-1980 European Consumer Price Index, food accounted for about 20% of the expenditure that made up the Consumer Price Index(CPI), while food accounted for about 55% the African CPI. This distinction was kept, with slightly different figures, in the "upper income" and "lower income" CPI calculations used until ESAP dictated that we should not be interested in distribution of the nation's wealth or expenditure, just in its overall size. But we are interested in the distribution, unless we get such a big share that we never feel hungry.
How did we survive?
"How did we survive the years of economic depression and hyperinflation?" The International Fund for Agricultural Development, a UN agency dedicated to eradicating rural poverty, estimated that $361 million came into Zimbabwe as remittances in 2008 and this could easily double in 2009. Eddie Cross reckoned the total might be a billion, which is far more than anyone had expected. If this much was coming as remittances, it would explain how people survived. Otherwise, we'd have expected to see more people die of hunger and disease than actually did in these recent years. Maybe. Or maybe more did die than we heard about. Population figures have been unreliable at least since the results of the 2002 census were quietly stuffed away in a dusty closet and forgotten. That census gave the population of Zimbabwe in August 2002 as 11.3 million. This was about what we should have expected from the 1997 intercensal survey which showed that the population growth rate, which had dropped from 1982 to 1992, was still dropping, as we would expect with HIV?AIDS still spreading. In fact Timothy Stamps, then Minister of Health, stated about the end of 2001 that birth and death rates had equalised. Allowing that the flood of emigration had already started, this meant that the population was already decreasing in 2002. We have no evidence of any change in those trends, so it is hard to claim realistically that we now have more than 10 million people living in the country.
On the Measurement of Zimbabwe's Hyperinflation
On the Measurement of Zimbabwe’s
Steve H. Hanke and Alex K. F. Kwok
Zimbabwe experienced the first hyperinflation of the 21st century.1 The government terminated the reporting of official inflation statistics,
however, prior to the final explosive months of Zimbabwe’s
hyperinflation. We demonstrate that standard economic theory can
be applied to overcome this apparent insurmountable data problem.
In consequence, we are able to produce the only reliable record of
the second highest inflation in world history.
The Rogues’ Gallery
Hyperinflations have never occurred when a commodity served as
money or when paper money was convertible into a commodity. The
curse of hyperinflation has only reared its ugly head when the supply
of money had no natural constraints and was governed by a discretionary
paper money standard.
The first hyperinflation was recorded during the French
Revolution, when the monthly inflation rate peaked at 143 percent in
December 1795 (Bernholz 2003: 67). More than a century elapsed
before another hyperinflation occurred. Not coincidentally, the inter-Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009). Copyright © Cato Institute. All
Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins
University and a Senior Fellow at the Cato Institute. Alex K. F. Kwok is a Research
Associate at the Institute for Applied Economics and the Study of Business
Enterprise at The Johns Hopkins University.1In this article, we adopt Phillip Cagan’s (1956) definition of hyperinflation: a price
level increase of at least 50 percent per month.
vening period represented the heyday of the gold standard. The 20th
century witnessed 28 hyperinflations (Bernholz 2003: 8). Most were
associated with the monetary chaos that followed the two World
Wars and the collapse of communism. Zimbabwe’s hyperinflation of
2007–08 represents the first episode in the 21st century and the
world’s 30th hyperinflation.
Most hyperinflations (17) occurred in Eastern Europe and
Central Asia, with Latin America accounting for 5 and Western
Europe for 4. While Southeast Asia and Africa accounted for 2
hyperinflations each, the United States has avoided hyperinflation. It
came close, however, during the Revolutionary War, when the revolutionary
government churned out paper continentals to pay bills.
The monthly inflation rate reached a peak of 47 percent in
November 1779 (Bernholz 2003: 48). A second close encounter
occurred during the Civil War, when the Union government printed
greenbacks to finance the war effort. Inflation peaked at a monthly
rate of 40 percent in March 1864 (Bernholz 2003: 107).
Zimbabwe first breached the hyperinflation benchmark in March
2007 (Table 1). After falling below the 50 percent threshold in July,
August, and September 2007, inflation soared, peaking at an
astounding monthly rate of 79.6 billion percent in mid-November
2008. At that point, as one of us anticipated, people simply refused
to use the Zimbabwe dollar (Hanke 2008: 9), and the hyperinflation
came to an abrupt halt.
As incredible as Zimbabwe’s November 2008 inflation rate was, it
failed to push Zimbabwe to the top of the world’s hyperinflation
league table. That spot is held by Hungary (Table 2).
Zimbabwe’s Data Void
Even though the Reserve Bank of Zimbabwe produced an everincreasing
torrent of money, and with it ever more inflation, it was
unable, or unwilling, to report any meaningful economic data during
most of 2008. Indeed, the last Reserve Bank balance sheet and
money supply data produced in 2008 were for March (Reserve Bank
of Zimbabwe 2008a). As for the 2008 inflation data, the last available
figures were for July, and these were not released until October
(Reserve Bank of Zimbabwe 2008b).
This data void hid Zimbabwe’s hyperinflation experience under a
shroud of secrecy. Our problem was to lift that shroud by measuring
Date inflation rate (%) inflation rate (%)
March 2007 50.54 2,200.20
April 2007 100.70 3,713.90
May 2007 55.40 4,530.00
June 2007 86.20 7,251.10
July 2007 31.60 7,634.80
August 2007 11.80 6,592.80
September 2007 38.70 7,982.10
October 2007 135.62 14,840.65
November 2007 131.42 26,470.78
December 2007 240.06 66,212.30
January 2008 120.83 100,580.16
February 2008 125.86 164,900.29
March 2008 281.29 417,823.13
April 2008 212.54 650,599.00
May 2008 433.40 2,233,713.43
June 2008 839.30 11,268,758.90
July 2008 2,600.24 231,150,888.87
August 2008 3,190.00 9,690,000,000.00
September 2008 12,400.00 471,000,000,000.00
October 2008 690,000,000.00 3,840,000,000,000,000,000.00
14 November 2008 79,600,000,000.00 89,700,000,000,000,000,000,000.00Notes: The Reserve Bank of Zimbabwe reported inflation rates for March
2007–July 2008. The authors calculated rates for August 2008–14 November 2008.
Sources: Reserve Bank of Zimbabwe (2008a) and authors’ calculations.
inflation after July 2008, when conventional inflation measures were
PPP to the Rescue
Does economic theory provide any insights that might assist in
solving our problem? The principle of purchasing power parity
(PPP) should be able to come to our rescue. PPP states that the ratio
of the price levels between two countries is equal to the exchange
rate between their currencies. Changes in the exchange rate and the
ratio of the price levels move in lock step with one another, with the
linkage between the exchange rate and price level maintained by
Highest Monthly Inflation Rates in History
Month with highest Highest monthly Equivalent daily Time required
Country inflation rate inflation rate inflation rate for prices to doubleHungary July 1946 4.19 x 1016% 207% 15.0 hours
Zimbabwe Mid-November 2008 79,600,000,000% 98.0% 24.7 hours
Yugoslavia January 1994 313,000,000% 64.6% 1.4 days
Germany October 1923 29,500% 20.9% 3.7 days
Greece October 1944 13,800% 17.9% 4.3 days
China May 1949 2,178% 11.0% 6.7 days
Notes: The authors calculated “equivalent daily inflation rate” and “time required for prices to double.”Sources: Hungary (Nogaro 1948); Zimbabwe (authors’ calculations); Yugoslavia (Petrovi´c
The Zimbabwe Economy
Presentation to Zimbabwe Investment Appraisal SummitCOMMERCIAL FARMERS’ UNION This presentation was given by the CFU at the Zimbabwe Investment Appraisal Summit recently held at the Celebration Centre in Harare on 24 and 25 August 2009. THE WAY FORWARD FOR INVESTMENT IN ZIMBABWE’S FARMING SECTOR Introduction This presentation contains recommendations on creating the right investment climate to promote substantial improvements in output of the main agricultural commodities produced in Zimbabwe. The downstream benefits will be much better food security for the population and enabling the sector to regain its former position as the number one contributor to overall exports and employer of labour once again. As for all productive sectors, in agriculture certain conditions need to be in place before any meaningful investment will occur. The environment must be conducive to investment by farmers and industries and service providers associated with agriculture. Of fundamental importance one must consider that very little investment is likely to take place in agriculture unless all the potential investors mentioned have confidence that the capital that they have expended in their respective businesses will be secure and will reward them with whatever returns they have envisaged from making the outlay. It is well known that whatever status our sector is in it has a tremendous impact on the rest of the economy because of the downstream links that exist. However in this presentation I will only be concentrating on investment as it affects farmers directly. Two main prerequisites must exist to generate the confidence necessary to expend large sums of money in a farm business, whether the capital is raised by reinvestment of profits or borrowing. Firstly, a farmer must feel assured that the business will survive long enough and generate sufficient income to fully pay back the monies invested especially in long term capital investment. There must be an established legal framework in existence that meets international standards that guarantees respect of property rights. If long term security does not exist there is no point in undertaking the investment. In farming the principal factor of production is land and if there is no respect of security of tenure farmers will shy away from making permanent improvements to their properties. Credit providers will also not provide funds if farmers do not own assets with enough collateral value to cover loans. The second requirement is that economic incentives are necessary and must be in place if farmers are to invest in increased production. If the outlook is that financial yields from certain farming operations are sufficiently rewarding over a long enough period they will be motivated into building up their businesses by expanding output of the commodities concerned. Again farmers require that the economic prospects in the medium to long term will be favourable if they are to gain sufficient confidence to make the necessary investments. Matters concerning land reform and the productivity status of agriculture in Zimbabwe have been well publicized for several years and it is not my intention to dwell on past developments other than to mention that the overall contraction of agricultural output since 2001 by well over 50% for most of the major commodities presents considerable scope for recovery and growth. However, in turn achieving growth is dependent on the appropriate conditions to production expansion being in place, and these are discussed in the proposals that follow. At this stage it is as well to summarise and state why new investment is so important for agriculture.
Overall objectiveThe main goal is to initiate the process of rebuilding agricultural productivity as rapidly as possible by instilling enough confidence amongst all farmers so that the necessary investments are made to achieve substantial and sustainable growth in the agriculture sector. This target can be achieved if the following steps are taken.
- Actively remove the conflict associated with the ownership of land.
- A moratorium to be immediately actioned on any proceedings associated with land resettlement pending the formulation of an equitable legal and administrative framework to deal with land matters
- Create an enabling environment for all persons wishing to involve themselves in agriculture as a profession.
- Establish a stable, attractive business environment for investment and production.
- Encourage wealth creation in the sector so as to stabilize the economy and promote growth.
These main steps are outlined in greater detail in the sections that follow which are separated into those associated with LAND MATTERS and those relating to PRODUCTION and the ECONOMY. A series of actions are recommended.
Part 1 - LAND ISSUES
1. Initiate actions immediately to stabilize the land resettlement programme by imposing a moratorium on further land reform proceedings. Actions called for to assist in achieving this goal are:-
- To cease all offer letters being issued
- To end all further evictions of productive farmers
- To halt all prosecutions relating to land in our sector
- Honour all property rights under the SADC treaty
- Respect and action Court Orders on land-related matters;
- Thoroughly investigate all criminal acts and prosecute the guilty parties;
- Establish an independent judiciary which must be allowed to operate autonomously;
- Pass sentences on offenders that are appropriate to the crime committed.
- Commission a land audit to establish complete details (who, what where) of all allocations of land including whether the land is being fully utilized or not.
- Domestic property rights laws need to be in compliance with international standards and all treaties (SADC, COMESA, etc) to which Zimbabwe is a signatory to.
- Amend the Constitution where necessary;
- Promulgate a new Land Acquisition Act that meets all international and SADC related standards;
- Repeal the Land (Consequential Provisions) Act and cancel the provisions;
- the Farm Equipment and Material Act
- Ratify and respect all BIPPAS and foreign investment rights;
- Put in place a title-deed tenure system for all agricultural land;
- Issue appropriate, and legally-binding, tenure documentation to all farmers;
- Establish an impartial National Land Board to administer the land tenure system.
- Re-engage skilled farmers to facilitate the recovery process;
- Allow displaced farmers who wish to return to farming to do so;
- Complete realistic valuations of immovable and movable property;
- Draw up a properly structured compensation program that is agreed upon by all parties, especially the title holders;
- The program should be based on a recovery or replacement system;
- Payments of compensation to be completed within a given time frame, indexed, and adjusted to prevailing inflation levels;
- An appropriate compensation package for all expropriated farms and assets would engender confidence and instill internal and international financial and material support;
- Where applicable, seek international funding to support this programme.
- Ways of declaring compensation “tax free” should be sought.
- Be allowed to expand its operations by taking over the administration of all land from Government;
- Be representative of ALL stakeholders in agriculture;
- Set up arbitration mechanisms to deal with land-related disputes;
- In the longer term, manage the transition to a uniform land-tenure system for all rural land in Zimbabwe.
- Long term security of tenure will encourage increased investment, productivity and co-operation between farmers;
- A properly-instituted tenure system should unlock donor and private funding and other assistance.
- Take steps as a matter of urgency to ensure that all farmers’ financial and input requirements for the coming season are met.
- Ensure that input manufacturers secure enough foreign exchange to cover their imported raw material and spares requirements. Where production capacity and time constraints are such that will not allow them to manufacture enough product to satisfy farmers’ requirements, sufficient foreign exchange must be made available to import finished inputs to offset manufacturing shortfalls.
- Maize seed imports must be put into action because of current shortages.
- Make certain that there is sufficient foreign exchange for imports of inputs not manufactured locally (e.g. chemicals, fuel, spares, etc).
- Exemptions from income tax and import duties should be considered for implementation during the recovery phase as incentives, and discontinued thereafter;
- Concessionary interest rates should be considered as a means to facilitate the recovery process and help rebuild lost capacity, but must eventually be phased out so that financial markets can operate without subsidies;
- Pursue exchange rate policies that provide fair returns to producers with prices being aligned to border prices.
- Allow market-driven exchange rates to continue so that farmers producing export commodities will derive prices that are not taxed by the over-valuation of the Zimbabwe dollar;
- Promote market driven prices and make certain that there is no return to controlled pricing.
- Ensure that quasi-fiscal activities undertaken by RBZ in the agricultural sector in the past does not recur.
- Improve communications between all stakeholders so production problems are identified and resolved quickly;
- Improve access to credit, inputs, and farm machinery and equipment and ensure that they are available in sufficient quantities when needed;
3. Encourage public and private sector infrastructure development and efficient service delivery so farmers can attain high levels of productivity.
- Provide support to Parastatals (e.g. ZESA, NRZ) so they operate much more efficiently;
- Re-establish cost-effective research services and crop and livestock disease control programmes that meet on-going requirements;
- Improve veterinary controls so that exports can resume to take advantage of lucrative external markets;
- Improve and expand agricultural training programmes;
- Facilitate the manufacture and procurement of all inputs required by farmers. Suppliers should be provided with sufficient foreign exchange to import necessary raw materials and finished products to fully service farming;
- Encourage the service sector (e.g. banking, transport) to become fully involved in providing the services required by farmers.
- Farmers organizations are best equipped to articulate farmers needs. The Farmers’ Licensing and Levy Act needs to be amended in such a manner that greatly improves FO’s access to subscription and levy income, so that they can service the industry better.
- Property rights should be respected and protected by the constitution which follows international standards
- A land tenure system that confers long term security and allows farms to be traded and provide collateral for credit as well as promoting investment.
- Rural land resources being managed by an independent and impartial entity which has representation from all stakeholders.
- Access to rural land afforded to all persons wishing to farm without prejudice to any segment of the population
- Rule of Law observed and enforceable by an impartial and independent judiciary and police force.
- A market driven economy with state interventions limited to providing social protection to the poor
- Macroeconomic policies followed that promote real growth in all sectors but especially the agricultural sector.