(TIỂU LUẬN) ESSAY subject MACROECONOMICS 2 TOPIC HYPERINFLATION OF ZIMBABWE

FOREIGN TRADE UNIVERSITY IN HCM CITY ESSAY Subject: MACROECONOMICS CLASS: ML55 TOPIC: HYPERINFLATION OF ZIMBABWE GROUP: 2011156060 Nguyễn Minh Duy (Leader) 2011156063 Bùi Hoàng Gia Hân 2011155161 Nguyễn Thục Hiền 2011155083 Lã Nguyễn Quang Cơng 2011156064 Đồn Thị Ngọc Hân 2011155088 Trần Nguyễn Linh Đan 2011155094 Nguyễn Vĩnh Đạt 2011156145 Nguyễn Phạm Hồi Anh 2011155122 Phạm Cơng Duy TABLE OF CONTENTS INTRODUCTION Research context: Research purposes: Research target and scope: Research method: Research structure: CHAPTER 1: THEORETICAL BASIS Definition of inflation Types of inflation 2.1 Creeping Inflation 2.2 Walking Inflation 2.3 Galloping Inflation 2.4 Hyperinflation Inflation and hyperinflation: Causes 3.1 Monetarist view of inflation: 3.2 Keynesian view of inflation CHAPTER 2: THE HYPERINFLATION CRISIS IN ZIMBABWE Context of Zimbabwe: Causes 2.1 Land reform programme 2.2 War funds 2.3 Government instability 2.4 Hope decreasing 2.5 Inappropriate price control Developments: 3.1 Before hyperinflation: 3.2 During Hyperinflation: 3.3 Hyperinflation to present day Consequences 15 4.1 Decreasing the value of savings and retirement money 16 4.2 Increasing unemployment rate 16 4.3 Food crisis 16 4.4 Decreasing average life expectancy decrease 17 4.5 Population shift 17 4.6 Menu cost 17 4.7 Poor billionaires 17 Measures the government can and should carry out in order to help the country abstain from the current state of hyperinflation 17 5.1 Dollarization of the economy 17 5.2 Modification of economic policy and a new policy construction 18 5.3 The money supply control 18 5.4 Foreign investors attraction by eliminating corruption 19 5.5 Reduction of military spending and conflict avoidance 19 5.6 Relations-strengthen with other countries 19 CHAPTER 3: ZIMBABWE’S RESPONSE TO ITS HYPERINFLATION 20 Dollarization 20 The effect of Dollarization 21 CONCLUSION 23 REFERENCES 24 INTRODUCTION Research context: -Unlike a stable inflation rate, hyperinflation is defined to be an economic situation where prices of goods and services skyrocket in a short period of time, thereby the amount of G&S sold is declining while its value is climbing at an accelerating pace -Hyperinflation is totally capable of destroying a whole nation’s economy Along with the macro negative influences, it also impacts many political, social and humane principles -Reported in 2008, Zimbabwe was named the second worst country to ever suffer from hyperinflation, just behind Hungary the postwar period After every 25 hours, prices were automatically doubled The government issued the most valuable cash papers which were valued at 100 thousand billion to cope up with the dire situation but it was just enough for a weekly bus ticket Besides, the monthly inflation rate of Zimbabwe was calculated to rise to 3,5 million % 50 million Zimbabwe dollars was merely affordable for an egg A loaf of bread was priced equal to buying 12 cars but 10 years ago -In addition, the infamous global economic crisis in 2008 created a ripple of effects to almost every economy and Zimbabwe’s was not an exception Combined with the inefficient domestic economy and accumulated debts, Zimbabwe was announced to be the first country in the 21st century to endure hyperinflation Despite efforts from the government to reduce expenditure, pay off public debts by raising taxes, they still failed to save the economy due to extended worker’s strikes Urgent national problems led the government to issue more and more cash to pay off debts for laborers, which made the hyperinflation status quo an irreversible crisis -Acknowledge the urgency and adverse consequences caused by hyperinflation to a macro economic scenario and Zimbabwe’s in particular, our group has come to a consensus that this would be the topic for our course’s report Our work will examine the root causes of hyperinflation, disastrous repercussions and therefore withdraw some of the lessons and experiences to illustrate how to avoid hyperinflation in an in depth manner Research purposes: -Our team will scrutinize the topic with specific purposes:  Analyze the root causes and hyperinflation’s impacts to Zimbabwe’s economy  Examine how the government of Zimbabwe dealt with the situation  Lessons learned to avoid hyperinflation and suggested solutions Research target and scope: -Target of the study: Hyperinflation crisis in Zimbabwe -Scope of the study:  Limitations of space: investigate hyperinflation’s causes, impacts and the government solution in Zimbabwe  Limitations of time: from 2007 to 2009 Research method: -Our team incorporates both the quantitative and qualitative approach into the study to look into the crisis:  The qualitative approach: analyze, compare, sum up several opinions coming from the citizens of Zimbabwe at the time examined to gain better knowledge of how it impacts activities of the economy  The quantitative approach: utilize the model AS-AD to analyze the theoretical causes of hyperinflation and gather information throughout the period studied to learn the crisis’s repercussions Secondary data is our team’s main source of information We look for sources, data, information from websites, magazines, channels, scientific research regarding the same issue domestically and internationally to approach the crisis in Zimbabwe Research structure: -The study comprises of chapters as follows:  Chapter 1: Theoretical base of knowledge with regards to inflation, thereby hyperinflation’s causes, impacts and solution to curb the dire situation  Chapter 2: Analyze hyperinflation crisis in Zimbabwe in the span between 2007 to 2009  Chapter 3: Examine how the government solved the problem and withdraw lessons and experiences on how to avoid hyperinflation CHAPTER 1: THEORETICAL BASIS Definition of inflation -Inflation is an economic phenomenon in which the price of goods and services continually rises as measured against a standard level of buying power, while the supply of goods and services declines as money devalues -Inflation aims to evaluate the total impact of price changes for a diverse range of goods and services, and it provides for a single value representation of an economy's growth in the price level of goods and services over time -Cagan (1956) defined hyperinflation as "beginning in the month the rise in price exceeds 50 percent and as ending in the month before the monthly rise in prices drop below that amount and stays below for at least a year" This equates to an annual rate of 13,000 percent Types of inflation 2.1 Creeping Inflation When prices grow by 3% or less each year, this is referred to be creeping or mild inflation According to the Federal Reserve, price increases of 2% or less enhance economic development Mild inflation raises consumer expectations that prices will continue to rise, which promotes demand Consumers buy now to avoid higher future pricing Mild inflation fosters economic growth in this way As a result, the Fed's target inflation rate is set at 2% 2.2 Walking Inflation Walking inflation ranges between 3% and 10% each year It is bad to the economy since it accelerates economic growth People begin to buy more than they need in order to avoid paying significantly higher prices later This increasing purchasing drives demand even higher, to the point where providers are unable to keep up and neither can salaries As a result, most basic goods and services are priced out of most people's grasp 2.3 Galloping Inflation When inflation reaches 10% or above, it has a devastating effect on the economy Money depreciates so swiftly that business and employee earnings can't keep up with rising costs and prices As a result, foreign investors shun the nation where this occurs, depriving it of much-needed cash The economy deteriorates, and government officials lose credibility Inflationary pressures must be avoided at all costs 2.4 Hyperinflation When prices rise by more than 50% each month, this is referred to be hyperinflation While hyperinflations are quite rare, once they start, they may quickly spiral out of control In reality, the majority of cases of hyperinflation occur when governments inflate money to fund wars Inflation and hyperinflation: Causes 3.1 Monetarist view of inflation: -An aggregate demand and aggregate supply framework is used by monetarists to explain the cause of inflation We suppose that if the money supply increases, the aggregate demand curve moves rightward, starting at a point where output is at the natural level The rate of output may rise above the natural rate Wages will rise when unemployment falls below the natural rate level, and the aggregate supply curve will quickly move leftward until the economy returns to its natural rate level The price level increased at the new equilibrium The final result of a constantly rising money supply is a constant price increase Money growth is the only cause of inflation in monetarist analysis because the money supply is considered as the only source of shifts in the aggregate demand curve -Monetarists use the idea of velocity of money, defined as the speed of circulation of one unit of money, to demonstrate that changes in aggregate expenditure are primarily influenced by changes in the money supply V= (P*Y) / M is the velocity determined by dividing nominal spending P*Y by the money supply M -By multiplying both sides by M, we obtain the exchange equation If velocity V is considered to remain constant, this equation becomes the contemporary quantity theory of money, which describes how aggregate spending is determined Aggregate expenditure will rise in the same proportion as the money supply grows and the velocity remains unchanged 3.2 Keynesian view of inflation A dramatic rise in money supply, according to Keynesians, will cause the price level to climb at a rapid rate constantly There are no other causes that can lead to a significant increase in inflation Inflation cannot be caused solely by fiscal policy or supply-side phenomena A negative supply shock does indeed move the aggregate supply curve backward, resulting in output below the natural rate level and a higher price Because unemployment is higher than the natural rate, the aggregate supply curve will return to its initial position At the initial price level, the economy returns to full employment When it comes to fiscal policy, a one-shot increase in government spending results in only a temporary increase in the inflation rate when output is over full employment, not inflation that continues to rise We could have a continuous rise in the price level if government spending increased continuously, which violates Friedman's argument This argument, however, is inadequate because, as Keynesians recognize, government spending cannot continue to rise continuously CHAPTER 2: THE HYPERINFLATION CRISIS IN ZIMBABWE Context of Zimbabwe: -Zimbabwe is a youthful country with considerable climatic and mineral resources Zimbabwe is rich in diamonds and some other minerals During the 1980s and 1990s, Zimbabwe was considered as one of the most developed and prosperous countries in Africa -The currency of this country (Zimbabwe dollar) starting on April 15th, 1981 At first, it was the 1, 5, 10 and 20 dollar banknotes But in the late 2000s, every Zimbabwean was paying hundreds of trillions of Zimbabwe dollars for an ordinary loaf of bread Zimbabwe's inflation had fallen to the highest level In July 2008, a glass of beer was doubled in price per hour -The government did nothing to solve this serious problem The Reserve Bank just kept printing more and more dollars During the peak of the economic crisis in Zimbabwe in 2008, prices rose at least twice a day and people had to carry large bags of money to buy food such as loaves of bread or bags of milk The inflation rate was so high that the Reserve Bank of Zimbabwe issued banknotes with a denomination of hundreds of trillions of dollars, which was the highest denomination in the world -In 2009, The Minister of Finance, Patrick Chinamasa, was forced to withdraw the order of using the only local currency for transactions because people not use local currency in daily transactions Also during this time, the government stopped reporting the inflation indicators -Citizens are allowed to openly use USD, EUR and South African rand for transactions and the US dollar was the most popular currency According to banks, four-fifths of transactions including transactions of domestically produced goods or payment of wages to workers and securities transactions were in US dollars Abandoning the domestic currency was a brave decision of the Zimbabwe government because they previously refused to Causes -Hyperinflation is a difficult problem to deal with By identifying possible causes of hyperinflation, we can avoid it in the near future In general, there are main causes of inflation The first is demand-pull inflation when aggregate demand exceeds aggregate supply Second, cost-push inflation occurs when an increase in the cost of production reduces aggregate supply, which increases prices Finally, monetary inflation occurs when the money supply increases continuously In this report, we will analyze deeply the causes of hyperinflation in Zimbabwe 2.1 Land reform programme -Firstly, the main cause of hyperinflation in Zimbabwe in about 1997 - 2008 was the "Land Reform Program" -During its colonial period and the early years of independence, Zimbabwe experienced export activity with large-scale agricultural product export and was economically successful, second only to South Africa After independence, much of this country's productive arable land is still owned by whites -During the 1990s, however, the government of President Robert Mugabe began transfer of ownership The Zimbabwean government redistributes land from farmers available to black farmers However, the new farmers had little experience so farmland was managed by people with a little bit of knowledge of agriculture and related activities They struggled to maintain production on a large scale in the past -As a result, the Land Reform Program reduced agricultural output, especially tobacco, which accounted for a third of foreign exchange earnings Wheat production that used to be 300,000 tons in 1990 has also decreased 50,000 tons left in 2007 2.2 War funds Next, Zimbabwe entered the Second Congo War from 1998 to 2002 The Mugabe government printed more money to help finance the war In 1998, despite the continued deterioration of the economic situation, the President sent 11,000 troops to the Democratic Republic of the Congo (DRC) to support Lauren Kabila Their entry into the war has depleted much of the country's monetary reserves, and Zimbabwe is reporting its war spending to the International Monetary Fund perhaps $22 million a month 2.3 Government instability -A government with severe unrest will not look attractive to foreign investors Companies not want to business in a country that is not safe to invest in and does not have the security of asset ownership Besides the war with the Democratic Republic of the Congo, conflicts between the ethnic Ndebele minority and the Shona majority in Mugabe have resulted in many clashes -Whites and blacks also have conflicts It happened mainly due to the Land Reform Program Whites disagreed because they lost business ownership, so some white business owners with experience in farming left the country There is also violence to suppress opposition politicians, thereby eroding confidence in the future of the country's politics 2.4 Hope decreasing -People and foreign investors lack confidence in the country's future and lose confidence in the country's currency This is largely due to: - Corruption Robert Mugabe's government was plagued with allegations of bribery and corruption scandals Zimbabwe was ranked 166th out of 180 countries in the world according to Transparency International's Corruption Perceptions Index (CPI) in 2008 10 collapsed, making farmers unable to borrow money The International Monetary Fund (IMF) refused to refinance and cancel debt because the IMF wanted to punish the country because it disagreed with Zimbabwe's policy of taking land from white landowners -In addition, Zimbabwe was involved in the Second Congo War, so Robert Mugabe, President of Zimbabwe needed cash to spend on his army and pay his soldiers So, when a government needs money, it will often try to generate income for the country through a variety of economic strategies such as increasing exports to other countries and attracting foreign investors But Robert Mugabe had another idea that would shock the world The idea is that the government will print more money to pay off foreign debts and public servants like soldiers and policy -Unfortunately, things have turned worse, an increase in the money supply does not equate to an increase in the productivity of the Zimbabwean economy, and only some new investments are real to create new goods In other words, citizens now need more dollars to buy the same amount of goods as before 3.2 During Hyperinflation: 12 -From the Table above, the estimated inflation rate for November 14, 2008 is 79,600,000,000% -Prices doubled every 24 hours When prices started to rise, the government responded by printing more money So the cycle continues and commodity prices continue to rise Because the price was so high, the government had to print money with a higher denomination At first they printed million Zimbabwe dollars, then they printed higher denominations of 100 million Then it was 10 billion and then 100 billion dollars -In 2008, prices started to increase by thousands of percent per month, so the government started printing 100 trillion dollars Zimbabweans became billionaires but that money was worthless because basic goods were still worth billions of dollars -In late 2008, a large bank's ATM had a data overflow error, preventing people from withdrawing money with too many zeros Despite some efforts to control inflation, the Zimbabwe dollar was officially phased out on April 12, 2009 and in 2014 the Central 13 Bank of Zimbabwe recognized the US dollar and several other currencies as legal tender -During hyperinflation, goods and services in Zimbabwe witnessed record high prices, reflection with some of the following items No Product/Service Bread Eggs Milk Oil Petrol Bus ticket Interest rate 3.3 Hyperinflation to present day -In January 2019, the government of President Mnangagwa decided to sharply increase the prices of gasoline (from $1.24 to $3.31 per liter) and diesel (from $1.36 to $3.11 per liter) from January 13, 2019 due to a serious shortage of fuel supply, which is considered as the worst situation over a decade, because of a lack of foreign currency The situation was exacerbated when people protested, the central bank announced a new monetary policy in February 2019, the prices of goods and services skyrocketed at an unprecedented rate of inflation -The establishment of the interbank exchange market caused prices to increase by 300% The price of a loaf of bread increased from $1.8 to $3.5 and the price of a box of butter increased from $8.5 to $17 The price crisis was recalling memories of a decade ago when hyperinflation peaked at 500 billion percent, ditched the Zimbabwean dollar 14 -According to the National Bureau of Statistics, in 2020, Zimbabwe's inflation rate increased to more than 800%, but it started to trend downward compared to the same period last year officially at 106.64%, and the inflation rate dropped to 50.24% Consequences -As we all know, hyperinflation can bring many bad effects to any country that is experiencing it This can be seen throughout the history of hyperinflation in the world Professor Steve H Hanke, an American applied economist at Johns Hopkins University published a journal with the Cato Institute listing the worst episodes of hyperinflation of all time: -From the table above, we can see that even the German hyperinflation of 1923 could not match Zimbabwe's hyperinflation, as this is the second worst inflation rate in 15 history All of the countries in this table experienced severe economic problems during peak inflation In addition to the problems that arose during the hyperinflation in Zimbabwe, there were many long-term effects that could only be seen after 2009, which is several years after the country reached its peak of inflation Some of the problems include: 4.1 Decreasing the value of savings and retirement money -People lose their savings because their purchasing power decreases People with certain types of assets have seen their value drop in a flash Old retirees with fixed incomes are hit hardest as the pensions they receive become worthless 4.2 Increasing unemployment rate -Unemployment rate in Zimbabwe from 1999 to 2020 (Excerpt from worldbank.org) The World Factbook ranks Zimbabwe's unemployment rate as the highest in the world, at 95% in 2009 Many Zimbabwean businessman went bankrupt between 2000 and 2014 due to the economic downturn so a lot of people lost their lives 4.3 Food crisis People in Zimbabwe have experienced food scarcity and most of them continue to survive by eating at least one meal a day if they are lucky enough A drought in the mid16 2000s reduced food production, adding to the fire Millions of people depend on food aid In 2013, Zimbabwe had 1.6 million people starving and had to receive aid from Europe and America 4.4 Decreasing average life expectancy decrease Life expectancy in Zimbabwe has decreased and the country has become the country with the lowest life expectancy rate in the world This is directly affected by the food crisis, high unemployment rate, widespread disease and high drug prices 4.5 Population shift The people of this country have fled to neighboring countries or displaced within Zimbabwe itself An estimated million Zimbabweans live outside the country for a better life 4.6 Menu cost The entire country incurs the cost of reintroducing price lists, fares, labels and restaurant menus as they need to be constantly updated Businesses have had to spend time and money adjusting their prices For example, bus tickets are priced differently in the morning and evening 4.7 Poor billionaires Prices of goods and services rise faster than wages and salaries Even though people get a salary of four million Zimbabwe dollars, they don't use it because food prices are so much higher For example, a sheet of toilet paper (not a roll) costs $417 Measures the government can and should carry out in order to help the country abstain from the current state of hyperinflation 5.1 Dollarization of the economy -In the history of development of Zimbabwe, the country cannot forget the record number of inflation of 23 million percent (23,100,100%) in July 2008 Unexpectedly, dollarization of the entire economy played an important role in combating hyperinflation in Zimbabwe -The global economic crisis in 2008 had a huge impact on most of the world's economies Zimbabwe was one of the wealthy countries in Africa in the 1980s, but by 17 July 2008, hyperinflation reached 23 million percent (23,100,000%) in this country, leaving 80% of workers unemployed -It is hard to believe that after only years, Zimbabwe has successfully controlled hyperinflation and we can delve deeper into this in Chapter 3, in which the application of the policy of dollarization of the economy will be exploited thoroughly -According to Steve Hanke, the dollarization of the economy has various advantages such as cutting hyperinflation immediately, quickly reducing deposit interest rates, and stabilizing the national budget However, this is only a short-term policy and does not guarantee national competitiveness Therefore, in the long term, the Zimbabwean state needs policies that can guide the country's economy to become more stable and sustainable And through careful findings and research, there have been proposed policies that the Zimbabwean government should implement so that the economy can improve in a sustainable way More specifically, these are the policies: 5.2 Modification of economic policy and a new policy construction Although some western countries disagree with Zimbabwe's Land Reform Program and want to abolish it, we just think it should be revised and implemented correctly The purpose of this policy is good but it is not fair to the majority of the population that are black Zimbabweans that white people still own farmland even after independence This policy has the same aim as Malaysia which has tried to regain lands owned by British companies through various strategies such as the Dawn of 1981 Raid However, the mechanism for implementing The land reform is substandard because most of the new owners don't know how to manage it The government should choose new owners with knowledge of agribusiness or set up a state-owned company to manage it 5.3 The money supply control The money supply must be regulated This is to ensure that the money supply does not grow faster than the economy's real output and matches the productivity of the Zimbabwean economy Robert Mugabe's idea of printing more money to pay off foreign debts and finance the war was the main cause of this economic disaster The Reserve Bank of Zimbabwe must be disciplined about creating more money The government should have learned from Germany's history, where it also printed too much money and experienced hyperinflation 18 5.4 Foreign investors attraction by eliminating corruption Mugabe's government is plagued by corruption scandals in the country The United States and the European Union have imposed economic sanctions targeting 200 of Mugabe's family and close friends Their foreign assets have been frozen in Europe Much of the farmland taken from white farmers ended up in the hands of politicallyconnected people Some army generals also receive it as a reward Policy can be successful if it is not given to people who have no knowledge of agribusiness When a government is transparent, it will create trust from the people and foreign investors This will attract Foreign Direct Investment (FDI) Therefore, it is considered beneficial for the economy of the country because the money inflow can create jobs to reduce the unemployment rate 5.5 Reduction of military spending and conflict avoidance Money spent on war with the Democratic Republic of the Congo could be used to improve infrastructure such as schools, hospitals and roads in the country There are also internal conflicts between the ethnic Ndebele minority and the Shona majority in Mugabe These conflicts have led to much violence and it is disliked by foreign investors People who conduct business will not feel safe and they also need to spend more money on security A country with a safe environment will attract foreign direct investment and increase confidence in its future 5.6 Relations-strengthen with other countries Zimbabwe must begin to make peace with the United States, United Kingdom, Germany and other European countries As Robert Mugabe has now resigned, the new president, Emmerson Mnangagwa is ready to strike a new deal with the International Monetary Fund (IMF) Zimbabwe should renegotiate with foreign lenders such as the World Bank and the IMF The country also needs the contribution of the international community China and its neighbor - African countries are some possible candidates to pour money into Zimbabwe must find a mutually beneficial arrangement, such as a promise to provide them with some projects once the Zimbabwean economy recovers Former finance minister, Tendai Biti said that Zimbabwe must seek a new relationship with Beijing based on equality and respect as well as with New Delhi, as India has become so significant that they can use it to boost their economy 19 CHAPTER 3: ZIMBABWE’S RESPONSE TO ITS HYPERINFLATION Dollarization - Zimbabwe's hyperinflation skyrocketed in 2008 The average GDP per capita fell to US$136, the lowest level in 53 years (at 2005 constant price) The Zimbabwean government's first attempt to manage inflation was to impose price controls on essential commodities by compelling merchants to sell goods at set rates In June 2001, the Grain Marketing Board was monopolized, primarily to control wheat and maize prices The government gradually began to regulate the wholesale and retail prices of other commodities - This finally resulted in market shortages, and there were moments when supermarkets were completely out of stock (2001 IMF Staff Report) - In 2006, 2008, and 2009, the currency was redenominated several times By December 2008, the use of foreign currency as a medium of exchange had nearly reached saturation, albeit unofficially, and the central bank had licensed around 1,000 shops to sell goods in foreign currency, ostensibly to help businesses suffering from chronic foreign currency shortages import goods and spare parts This was Zimbabwe's first conscious recognition of unofficial dollarization; yet, the central bank's action was purely political in nature When it was realized that the country had de facto dollarized and that the government was still collecting taxes in the worthless local currency, the decision was made to support the ruling regime by increasing the amount of foreign currency flowing into its coffers by collecting hard currency taxes from 1,000 shops while criminalizing the use of foreign currency in the informal sector, where it could not collect taxes This revealed to all that the government was self-serving; on the one hand, it was still paying civil workers’ salaries in the worthless Zimbabwean currency, while at the same time expecting them to be able to buy needs in shops with foreign cash The minister of finance conferred legal tender status to the South African Rand and the US dollar in January 2009, a month after the licensing of 1,000 shops, completing official dollarization Local currency was confined to being used in small transactions and for change, similar to how local coinage are used in other officially 20 dollarized economies In this context, the opposition leader was sworn in as Prime Minister as part of the September 2008 power-sharing deal, following a compromise on cabinet post allotment The establishment of official dollarization, bolstered by political accommodation, had the obvious immediate effect of halting hyperinflation, and the country actually entered deflation, with consumer price inflation at -2.34 percent and - 3.26 percent, respectively, at the end of January and February Bilateral donor aid began to flow into the country, and the country predicted positive growth for the first time in almost ten years (Ministry of Finance, 2009) Though the IMF approved targeted technical assistance in the areas of tax policy and administration, payments systems, lender-of-last-resort operations and banking supervision, central banking governance and accounting to Zimbabwe in May 2009, the country's relations with the Bretton Woods financial institutions have yet to normalize The resumption of collaboration was based on the observation of a significant improvement in the Zimbabwean government's cooperation on economic policies to solve the country's debt challenges (IMF, 2009) On the other hand, the bank has yet to resume any type of engagement with Zimbabwe, citing the lack of conditions suitable to a full-fledged economic development program with the country (World Bank, 2009) - However, high denominations such as Z$100 trillion were still utilized (making it the world's largest note), eventually leading to the introduction of the fourth Zimbabwean dollar (2009), which made trillion dollars equal to one new dollar - Both of these efforts, however, had little impact In February 2009, the authorities ultimately established a multicurrency system, in which five foreign currencies were designated as official, and the US dollar was designated as one of the principal currencies for government-related transactions In 2009 and 2010, the budget expenditure allocation was done in USD, and the native currency was eliminated until 2012 The effect of Dollarization -The creation of a multi-currency system helped boost the country's economy and brought discipline back to the market by financing the budget As a result, the economy in Zimbabwe has shown certain improvements Real GDP growth rate grew from almost -20% in 2008 to around 7% by the end of 2009 21 (Source: MECOmeter) -The prices of commodities became more stable and the inflation problem dropped to single digit values between 2010 and 2012 The cost of transactions to the government reduced significantly for business transactions with the US because of dollarization Dollarization contributed to the promotion of agriculture Zimbabwe was an agriculture based economy with around 80% of the population living as small farmers in rural areas The agriculture sector, hence, played a big role in the economy, it registered a growth rate of 17% between 2009 - 2012 and a gain of 24.3% in productivity The manufacturing, mining and quarrying sectors too contributed immensely to the growth in GDP -As a result, dollarization became a success for Zimbabwe's struggling economy However, it also poses some specific challenges for the country's future The hyperinflation has shaken the confidence of people in the financial institutions of the country and people started keeping their foreign currency transactions outside the financial system -Besides, the import and export of Zimbabwe, mainly to South African countries, is heavily influenced by the USD/Rand exchange rate The transportation of goods has 22 also become extremely difficult and this has greatly affected the competitiveness of Zimbabwe with countries around the world Another major disadvantage of dollarization is the loss of seigniorage money (the income earned from the issuance of money) - a huge contributor to the government's revenue in times of hyperinflation broadcast -Zimbabwean politicians and senior officials are also very concerned that dollarization could bring unwanted erosion of sovereignty and monetary independence For them, dollarizing and abandoning the country's currency is also claiming that they will lose the country's sovereignty and pride -However, with the economy gradually recovering and economic systems adjusting to dollarization, banks are forced to adopt competitive and transparent practices, hence leading to stability in the banking system By the end of 2009, the total bank deposits increased by 750% from the December 2007 level The stable exchange rate, lack of monetization of the budget deficit and absence of black markets compensated for the disadvantages of dollarization and lack of control over the monetary policy CONCLUSION According to the essay, hyperinflation in Zimbabwe exhibits nearly all the hallmarks of classic hyperinflation that a country suffering a growing fiscal deficit would be sensitive to both internal and external fiscal shock When inflation hit, financial authorities tried to manage and rectify an inefficient tax system, while continuing to print additional money in the meanwhile, which caused the inflation to get worse As inflation worsened, the financial authorities were forced to print ever-increasing amounts of money To sustain tax revenue at the time, the government implemented measures such as price control and suppressing the black market Thus, the government's constant printing of money to meet its needs is the primary cause of hyperinflation, undermining the value of the Zimbabwean dollar and driving up the prices of imported products Hyperinflation is harmful to all markets, including currencies, investors, labor markets, materials, and fuels Therefore, various steps were taken by the government to curb the 23 inflation: 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Available at: https://tuoitre.vn/zimbabwe-100-ty-dola-1-o-banh-mi-269771.htm (Accessed: 29 December 2021) 18 World Bank, (2009) World Bank Still Has Not Resumed Lending to Zimbabwe Available at http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:2218 9250~menuPK:3325325~pagePK:34370~piPK:34424~theSitePK:4607,00.html (Accessed 25 Feb 2022) 19 Zímtat, X (2013) ‘Census 2012’, National Report 25 ... Hyper Inflation in Zimbabwe Available at: https://www.economicshelp.org/blog/390/inflation/hyper-inflation-inzimbabwe/ (Accessed: 27 March 20 22) 15 Reserve Bank of Zimbabwe (20 21) Zimbabwe Inflation... Lending to Zimbabwe Available at http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK :22 18 925 0~menuPK:3 325 325 ~pagePK:34370~piPK:34 424 ~theSitePK:4607,00.html (Accessed 25 Feb 20 22) 19 Zímtat,... view of inflation: 3 .2 Keynesian view of inflation CHAPTER 2: THE HYPERINFLATION CRISIS IN ZIMBABWE Context of Zimbabwe: Causes 2. 1 Land reform programme 2. 2