ECON-202: Macroeconomics Virtual Lab Activity 01 - Zimbabwe Inflation

This report analyzes the hyperinflation crisis in Zimbabwe, examining its causes, effects, and the measures taken by the central bank to combat it. The report begins by defining different types of inflation indices and then delves into the reasons behind Zimbabwe's hyperinflation, including economic mismanagement, increased money supply, and external factors. It explores the detrimental effects of hyperinflation, such as decreased purchasing power, reduced employment opportunities, and business instability. The report also discusses the causes of hyperinflation in Zimbabwe, focusing on government policies, land reforms, and the need to finance various expenditures. Furthermore, it details the actions taken by the central bank, including increasing interest rates, limiting transactions, and currency redenomination, as well as the eventual adoption of a foreign currency. The report concludes with an analysis of Zimbabwe's GDP growth, presenting a correlation plot of GDP growth and inflation rates, and providing insights into the country's economic performance.

Macroeconomics (ECON-202)
Virtual Lab Activity 01
Names & ID:
Maha Ali 200108671
Habiba Haggag 200108526
Sumaia Alsadi 200111805
Hasan Bin Abbod 200108928
Reem Almansoori 200116547
Submitted to: Dr. Munshi Afzal

Table of Contents
Different types of inflation indices.............................................................................................3
Study the reasons for and effect of hyperinflation......................................................................3
Causes of hyperinflation in case of Zimbabwe...........................................................................3
Measures taken by central bank to fight hyperinflation.............................................................4
Analysis and Interpretation Part:................................................................................................5
GDP growth in Zimbabwe..........................................................................................................5
Correlation Plot...........................................................................................................................6
Reference:...................................................................................................................................8

Different types of inflation indices
Inflation is the gradual loss of a currency's purchasing power over time. The increase in the
average price level of a basket of selected goods and services in an economy over time can be
used to calculate a quantitative estimate of the rate at which purchasing power declines. A rise
in the general level of prices, which is often expressed as a percentage, means that a unit of
currency now buys less than it did previously. Inflation is distinguished from deflation, which
occurs when money's purchasing power rises while prices fall (FERNANDO, 2022).
(Pettinger, Different types of inflation, 2021)
Study the reasons for and effect of hyperinflation
In 2007, Zimbabwe faced hyperinflation, and one of the main reasons was that they changed
the economic system, but it would benefit them. On the contrary, there was mismanagement
that led to many negative effects, in addition to other reasons, an increase in the money supply
that could be spent, which required more services and goods. In this case, the supply of
services is fixed, but the amount of demand increases, so the prices of goods tend to rise, also
one of the main and important reasons is the war between countries that leads to
hyperinflation.

Hyperinflation will lead to a weakening of the purchasing power of the currency due to the
rise in prices of products such as fuel and food.
 Hyperinflation may affect products because when prices rise and things get worse,
many people resort to storing food and goods at home, which makes stores empty of
stock.
 Double the value of the currency.
 Decreased employment opportunities: When the rate of inflation rises due to this to
an economic stagnation.
 Increased demand: The sudden increase in demands causes excessive inflation and
costs citizens and the government.
 Business stops due to uncertainty about the future economic situation.
 Increased borrowing and costs.
 Decreased desire to save money.
Causes of hyperinflation in case of Zimbabwe
Several factors led to inflation in Zimbabwe. With the rise in the national debt in exchange for
a decrease in the rate of economic production and a decrease in revenues for exports, the
government pushed to increase the printing of securities. Determining prices, which led to an
increase in the shortage and loss of confidence in the government, economic and political life,
and the expectation of hyperinflation were also main causes of influential in this crisis.
Moreover, when the Zimbabwean government introduced land reforms in the late 1990s,
taking land from white farmers and giving it to inexperienced black farmers greatly reduced
productivity. Consequently, the economy fell sharply in industrial and agricultural production,
which subsequently led to the collapse of bank lending, and prompted the government to
increase paper printing as well. In addition to the need to finance the Congo war and pay the
salaries of soldiers and officials. With the deterioration of the economy, printing papers
became a futile solution aimed at calming anxious people who depend mainly on government
salaries. The deterioration of the economy became worse, the government debt increased to
cover the higher debt, and the government saw that printing more money was a solution that
actually caused an increase in inflation. Bond holders suffered from a drop in the value of
their bonds and the economy witnessed a severe shortage of goods, which means inflation)
Pettinger, 2019(.

Measures taken by central bank to fight hyperinflation
As inflation is a decline in the purchasing power of a specific currency, it causes the prices of
goods and services to increase overtime causing an increase in inflation. When the prices of
goods and service increase by more than 50% per month over a given period of time,
economists consider that hyperinflation. In the financial crisis of Zimbabwe, the inflation rate
for the month November itself was 79,600,000,000% (Hyperinflation in Zimbabwe, 2019).
This means the daily inflation rate was 98% which makes Zimbabwe’s financial crisis rank as
the second biggest hyperinflation rate in the history. As regarding the solution, there were
multiple actions taken by Zimbabwean government and the central bank to reduce
hyperinflation. In 2008, the reserve bank of Zimbabwe announced pursuing a contractionary
monetary policy where it will reduce the hyperinflation to 10% and establish an economic
growth of 7.4% (ANALYSIS OF THE 2021 MONETARY POLICY STATEMENT, 2021).
first action that was taken to overcome hyperinflation was increasing interest rates. The
reason behind that was to discourage borrowing with the current liquidity constraints.
Moreover, the central bank limited the withdrawal and money transactions to only Z$2,000
and Z$5,000 per transaction as part of the contractionary monetary policy (monetary policy
statement, 2022). In addition to that, the reserve bank of Zimbabwe announced a new
Zimbabwean dollar where ten zeros are removed. This means that a Z$10 billion dollars will
be equal to Z$1. This is called redenomination and is used to fight hyperinflation (monetary
policy statement, 2022). Eventually, the Zimbabwean government decided to adopt a foreign
currency as their official currency and no longer actively use the Zimbabwean dollar (The
2009 Mid-year Monetary Policy statement, 2009). In 2009, the Zimbabwean dollar was
abandoned and the U.S dollar was officially announced as their main foreign currency due to
failure of redenomination and lack of confidence in the Zimbabwean dollar.
Analysis and Interpretation Part
GDP growth in Zimbabwe
The GDP shows how much the country has grown or deteriorated economically. In this
context, the above graph provides a graph related to the GDP growth in Zimbabwe. In this
context, the economic condition of Zimbabwe was down due to the endemic corruption and

political violence (Tradingeconomics.com, 2022). Accordingly, in the graph, the GDP rate is
shown between the years 2000 to 2020. On the other hand, the graph shows some positive, as
well as negative aspects. On the other hand, the ideal GDP growth of a country needs to
remain in between 2.5% to 3.5%. In case a country’s GDP rate shows the ideal number of
GDP growth then it can be said that the country is in safe condition with respect to the
economy.
Figure 1: GDP growth rate of Zimbabwe
(Source: Created by author)
Accordingly, in the graph the GDP lies between -20 to 20. In the graph different kinds of
parameters have been used to determine the GDP growth of Zimbabwe such as the Valid,
Missing, Mean, Std Deviation, Minimum and Maximum. The valid GDP growth is 21 sown
in the figure. In this context, the missing rate is 0. The mean rate is considered as 0.133. On
the other hand, the Std deviation of Zimbabwe is 9.822. Moreover, it is found, that Zimbabwe

has had an average growth in the economic conditions. The minimum rate of Zimbabwe is -
17.670. Along with that the graph also shows the maximum rate of the GDP growth which is
19.680. Therefore, the economic growth is quite good in Zimbabwe.
Moreover, in case there is good economic growth the country enhances the national output
and expenditure. In this context, the GDP growth also pushes the country to build up the
ability of making growth in the education and health care growth (Economicshelp.org, 2022).
A country with good economic growth can add different kinds of resources to develop the
future of the country. For instance, the economic condition of Zimbabwe is recovering due to
the industrial growth, high rate of agricultural production along with stabilisation of the price
rate as well as exchange rate (Worldbank.org, 2022). In this context, the GDP rate of
Zimbabwe in 2000 was -3.06, in 2005 was -5.71 which shows a declining condition. Whereas
the GDP rate in 2010 was 19.68 which resembles a positive growth in GDP. In the current
years of 2020 is -6.25 which again resembles a downfall of GDP. Thus, it can be said that the
economic condition of Zimbabwe is far better than previous conditions.
Correlation Plot
GDP growth is known as the exact indicator of the economic growth of a country. On the
other hand, the GDP per capita is related to the standard of living. Therefore, if the GDP rate
of a country is mostly with standard living then it can be considered as the positive correlation
plot. The inflammation rate of a country can be defined as the rate of percentage the country
has increased or decreased in a stipulated period of time. On the other hand, the GDP of a
person refers to how much a county has grown its GDP rate due to the income done by a
single person. In the graph the inflammation rate of the Zimbabwe as shown.

Figure 2: Correlation plot of GDP Growth rate along with inflammation rate of
Zimbabwe
The above figure shows the inflammation rate between -4 to 10 along with the GDP growth
rate between -20 to 20. In this context, the inflammation rate rises due to the policy and
regulation of the government. Along with that, rising wages is also a cause of Inflammation.
In the above figure the inflammation rate of a person in Zimbabwe is -0.458 and p-value is
0.037. Thus, this is the inflammation rate of Zimbabwe in recent years.

Reference
FERNANDO, J. (2022, 1 12). Inflation. Retrieved 3 3, 2022, from
https://www.investopedia.com/terms/i/inflation.asp
Pettinger, T. (2021, 4 4). Different types of inflation. Retrieved 3 3, 2022, from
https://www.economicshelp.org/blog/2656/inflation/different-types-of-inflation/
Borad, S. (2022). Hyperinflation: Meaning, Causes, Effects, Examples and More. Retrieved 4
March 2022, from https://efinancemanagement.com/economics/hyperinflation
Pettinger, T. (2019, Nov 13). Hyper Inflation in Zimbabwe. Retrieved from Economics Help :
https://www.economicshelp.org/blog/390/inflation/hyper-inflation-in-zimbabwe/
INSTITUTE OF CHARTERED ACCOUNTANTS OF ZIMBABWE. (2021). ANALYSIS
OF THE 2021 MONETARY POLICY STATEMENT [Ebook] (pp. 7,8,9). Retrieved 2 March
2022, from https://www.icaz.org.zw/imisDocs/ICAZ%20Monetary%20Policy%20Statement
%20analysis.pdf.
Reverse bank of Zimbabwe. (2022). monetary policy statement [Ebook] (p. 146). Retrieved 2
March 2022, from https://www.rbz.co.zw/documents/mps/mpsjan2009.pdf.
Reverse bank of Zimbabwe. (2009). The 2009 Mid-year Monetary Policy statement [Ebook]
(p. 17). Retrieved 2 March 2022, from
https://www.rbz.co.zw/documents/mps/mpsjuly2009.pdf.
Economicshelp.org,(2022).Benefits of economic growth.
Tradingeconomics.com,(2022).Zimbabwe GDP Annual Growth Rate.
Worldbank.org,(2022).The World Bank in Zimbabwe.