Question

What were the causes of hyperinflation in Zimbabwe, and how did government policy contribute to the sustenance of hyperinflation in Zimbabwe? If you were the president of Zimbabwe what would you have done differently to put a stop to the hyperinflation? Explain your answer.

Answer 1

Inflation means a continuous rise in the general price level of an economy over a period of time. A rise which becomes, at first noticeable but if not monitored could become unmanageable.

Such a situation of very high inflation is called hyperinflation where the rate of inflation spirals very quickly causing panic and chaos at the macro level of an economic system. Since it leads to fall in the value of domestic currency , the confidence of the people I their home currency is visibly shaken and they start to hoard their savings in the form of other foreign currencies whose value has been reasonably consistent and stable as compared to their own home country’s currency.

Though initially, Zimbabwe registered a high growth rate yet as the years went by the economy could not adjust itself and adapt to the basic changes that were adopted to bring about a rapid growth rate in its economic set up. The collapse of the contribution of the primary sector to its GDP lead to a cost push spiral which further accelerated into an uncontrollable economic crisis.

To add to this situation was the internal strife that the nation was facing and war being an unproductive expenditure on the government, the State soon had to face huge amounts of deficit with hyperinflation looming large on the economic structure.

The government should create an awareness about the economic scenario in the country. The President should perhaps, address the nation on a very diplomatic and candid note, cautioning the general public about being economically aware and proactive towards the nation which should be the need of the hour.

The immediate measure is to reduce the current account deficit to a reasonable percentage of the total trade balance and instil ‘confidence’ in the minds of its citizens , the immediate economic goal which ahs to be achieved is to stabilise the exchange rate of the Zimbabwe Dollar vis-à-vis the other trading currencies.

A confident political head could also make the scenario more positive.

While the aggregate demand should not be reduced , the government policy should be aimed at stabilising both aggregate demand such that price levels across all commodities are stabilised . The banking system should work in tandem with the fisc—or the state and this would automatically create confidence in the minds of the citizens.

Fiscal policy measures such as taxing of luxurious items, imports and so on should be put In vogue immediately though they have to be combined with active monetary measures that would ultimately work in creating a ‘decelerating’ effect on the rising inflation .

The President should also actively involve organisations like UN , the IMF and so on and seek their expert advice and help in such situations