Wednesday, 6 August 2008

Now not to deal with inflation

This report, by Angus Shaw of the Associated Press, from the SFGate tells us that
Zimbabwe announced Wednesday that it is knocking 10 zeros off its hyper-inflated currency - a move that turns 10 billion dollars into one.
The report goes on to say
President Robert Mugabe threatened a state of emergency if businesses profiteer from the country's economic crisis, a move that could give him even more sweeping powers to punish opponents in the event that political power-sharing talks fail.

"Entrepreneurs across the board, don't drive us further," Mugabe warned in a nationally televised address after the currency announcement. "If you drive us even more, we will impose emergency measures. ... They can be tough rules."
The report also notes why the zero have been dropped.
Gono, the central bank governor, acted because the high rate of inflation is hampering the country's computer systems. Computers, electronic calculators and automated teller machines at Zimbabwe's banks cannot handle basic transactions in billions and trillions of dollars.

Inflation, the highest in the world, is officially running at 2.2 million percent in Zimbabwe, but independent economists say it is closer to 12.5 million percent.
Will this reduce inflation? No, as it does not deal with the real cause of the problem, but only a symptom. As the report says
Economist John Robertson said the new bills will soon be worthless, because the inflation rate continues to skyrocket. What costs $1 at the beginning of the month can cost $20 by month's end, he said.

"This is attending only to the symptoms of the problem. The real problem is the scarcity of everything driving up the prices. ... The government has not only caused the scarcities but damaged our ability to fix the problem."

At the root, he said, is the damage to the farming sector, along with government raids on the state pension fund and foreign currency bank accounts of businesses.
This report from the Washington Post tells us
Zimbabwe's money shortages, inflation and chronic shortages of food, gasoline, medicine and most basic goods have brought many businesses in Harare to a standstill. Smaller shops and at least four main restaurants have shut down.

State media reported Saturday that nightclubs were canceling music shows because audiences dried up after a 2,000 percent increase in prices for beer and soft drinks in the past week. Several bars and clubs were openly accepting U.S. dollars, even though that is against the law
No one should be surprised that this is happening. With the Zimbabwe dollar worthless, it is sensible for people to move to another median of exchange. The new notes will do nothing to change this. It is impossible to believe that people will assume that the government will stop printing money money just because it issues new notes and coins.


matt b said...

At 12.5 million percent inflation, I reckon taking 9 zeros off will buy their currency about 22 months until it crosses $1 billion again and so is back at this point. In the month $1 in today's month crosses $1 billion, it will go from being worth $830 million at the start of the month to $2.2 billion!

Their currency halves in value every 43 hours.

Paul Walker said...

How about a new iPredick stock on when the Zim govt issues its next billion dollar note?