Case: Zimbabwe

descends into chaos

Zimbabwe Case
An interesting case on country risk
Experienced 7-digit inflation recently

( Monthly inflation : 80 billion %)

Population 13 million ( of whom 3 million
immigrants)

Zimbabwe Case ( contd..)

In

2008, 80% of population was below

the poverty line (ZWD 13 Trillion/month
(USD 41 )
Something

like 317 billion ZWD per

USD
Unemployment
International

( 94% at end 2008)

isolation for many years

3

Highest Inflation Rates in the

world ever!!

Question 1
What are the key elements of country
risk in Zimbabwe?

Question 1 ( on key elements

of country risk)
Fiscal

imbalance
Monetary instability
Absence of property rights
Exchange and price controls
Pervasive corruption
Absence of basic institutions of
government
6

Question 2
How has increased country risk
affected economy and living
standards?

Question 2 ( on the impact of

govt policies on the economy)
Economy

has nose-dived
Per capita income has plummeted
Galloping inflation
Acute shortage of basic necessities

Question 3
By how much is Zimbabwes currency ,
at its official rate, overvalued relative
to its black market rate?

Question 3 ( on currency
overvaluation )
Zimbabwes

currency overvalued by
nearly seven times, as follows:
Currency overvaluation = Black market
rate / official rate = 5500 / 824 = 6.67
times
Question:
What are the implications of an overvalued currency to the countrys
economy?
10

Question 3 ( contd..)
Likely impact of currency
overvaluations:
Adverse impact on exports
Shortage of foreign exchange, preempting essential imports ( lifesaving drugs, imports needed by
export-oriented industries)

11

Question 4

Suppose we attempted a diagnostic flow

chart explaining the collapse of
Zimbabwes currency, what would it look
like? We keep currency erosion as the last
box in the flow chart.
(1)

(2)

(3)

(4)
Erosion of
currency
value

12

Question 4
This is how the flow chart might look like:
(1)
Large Budget
Deficits

(2)
Financed by
printing more
money

(3)
Galloping
inflation

(4)
Erosion of
currency
value

Couple of interesting questions on the

next slide
13

Questions
1 How do common people survive in
hyperinflationary conditions, such as
Zimbabwe in the recent past?
2 A country experiencing hyperinflation seeks your advice on
bringing inflation under control. What
advice would you give them? Is there
anything in the macro-economic
toolkit that might help?
14

Geffry Sachs

Currency Board

Countrys
money stock
linked to its
stock of foreign
reserves

See next slide

for an update
on Zimbabwe

Free
convertibility at a
fixed rate of
exchange to the
anchor currency
( say the USD)

Questions
1 What happens if central bank sells USD 20 billion from reserves?
2 Would you contemplate a similar system for India?
15

An Update on Zimbabwe
There has been some improvement in the last three years
Power-sharing and political stability
Economy slowly getting on track (GDP $ 13.66 billion,
growth 4.4%, Per capita $ 800, Inflation down to 8% )
Exports $ 3.144 billion, Imports $ 3.677 billion . Major
trading partners : S. Africa and China)
Use of Dollar, and South African Rand as legal tender
International organizations ( IMF, World Bank, others)
actively involved in helping the country turn-around
Foreign investment is beginning to come in. ( eg. Essar
Steel has plans to invest in steel and coal ( about $ 600
million )

16