Inflation A Present Danger!!

Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” From mid 2005, to early 2009, as Zimbabwe printed more and more dollars; hyperinflation rallied to over 500 billion percent. (Friedman certainly seems to be on point)

However, for Zimbabwe to fully escape the scourge of inflation, one has to read through the whole picture. In 2008, before adopting the US Dollar, Zimbabwe inflation peaked at 500 Billion per cent, according to IMF figures. In 2009, the US Dollar became adopted as the medium of exchange. Hyperinflation was halted, as The Reserve Bank could no longer hyper print money.

Tendai Biti, the Minister of Finance, confirmed inflation figures of 3, 3% (year on year) in January 2011. By May 2011, the figure had risen to 2,5%.June 2011 had an inflation figure of 2,9%. Though not in the billions, inflation still persists even after dollarization. Year ending 2011, Biti estimates inflation will be higher between 4- 4, 5%.

High foreign debts plus excessive international liabilities, coupled with excessive government expenditure and a contracting productive base, forced the government to spend over a decade printing Zimbabwe dollars, before Feb 2009. The resulting hyperinflation which broke world records could not be sustained to perpetuity. In March 2009, the Zimbabwe dollar was withdrawn as acceptable currency. For Zimbabweans, dollarization to contain hyper inflation has meant they is little money on the streets. This worsens the impact of even single figure inflationary pressures-given only a limited amount of US dollars is in Zimbabwe, small rates of inflation have a heavy weighted impact on purchasing power, as poverty is rife.

To regain public confidence new monetary strategies will need to be considered for the long term.

Unfortunately even today old problems still persist. International debt stands at over $7 Billion. Zimbabwe cannot service its monthly foreign liabilities.

Tendai Biti says, “We are supposed to be collecting $230 million every month, but at the moment we are only managing to get $150 million.” In a word: government expenditure is too high. The government however cannot print money to service its expenditure as in the ‘bad’ old days. Furthermore, as foreign investors and donors worry about indigenisation, productive capacity remains small.

Given the challenges of debt, stability, growth and day to day survival, Zimbabwe still has the dreaded inflation, on top, to contend with. The IMF agrees.