High inflation levels also adversely affect the value of people’s savings. Therefore, as it is currently happening in Zimbabwe, people prefer to spend their money as soon as it is earned to prevent further loss of its value. This contributed to a demand-pull inflation in the economy, aggravating the situation.
Due to its exorbitant inflation rate, the Zimbabwean dollar has lost its value as compared to international currencies. As a result, the big Zimbabwean producers have lost their confidence in the currency of their country and demand either foreign currency or gold in exchange of their products. This decreases the demand for the Zimbabwean dollar exacerbating the situation and the suffering of lower income families.
The lack of saving within the country, adding up to the uncertainly takes away any possibility for further investments. The lack of investment creates unemployment and therefore there would be less money injected to the circular flow of income.
According to classic economics, there are a few ways to reduce high inflation rates. One way is the use of fiscal policy. This policy is usually used when there is a demand-pull inflation. This policy may include an increase in taxes or decrease in government spending. However this policy does not make sense in a country such as Zimbabwe where 80 per cent of its population live under the poverty and survival line.
It is very difficult for the Zimbabwean government to reduce its spending because of its public commitments, especially in the time of food shortage and high unemployment. The government may also consider increasing interest rates or reducing money supply (deflationary monetary policy). Increasing interest rates will also most likely fail, unless the government decides to impossibly outpace the inflation rate. The government also seems unable to stop further money supply, as its own tax revenues have dropped due to the reduction in the overall output of the country. So by reducing the supply of money, the government would be forced to lay off many civil servants or announce bankruptcy, both of which would lead to chaos in the country.
If the inflation is believed to be due to excessive growth of the money supply then the solution is that the money supply should only increase by the same amount as the real increase in national output. If the money supply increases more than the national output, then the economy would face a situation where ‘there is too much money chasing too few goods’ and consequently prices will rise. The high inflation level in Zimbabwe after 1980 is a result of excessive growth in money supply. After 1980 when the government was unable to raise tax revenues, it responded by printing money to pay its bills. In 2005, Zimbabwe repaid part of its debt to the IMF by printing 21 trillion Zimbabwean dollars.
In Harare, the capital city, bus drivers increase their prices twice daily. Currency notes are only printed on one side to save ink and come with a use-by-date.
It seems that the government in Zimbabwe is running out of options. The only way for the government to improve the situation is to regain the trust of its people and the international community. This is sometimes not easy to achieve in the short run, especially when the steering wheel of affairs run out of hand. That is why Mugabe’s government seems to be seeking a dignified way to step down and leave its successors to give the country a fresh start.
Bibliography
1. www.tutor2u.com
2. Economic for AS, by Collin Bamford
3. www.BBCnews.com
4. http://en.wikipedia.org/wiki/Inflation
5. http://en.wikipedia.org/wiki/Zimbabwe
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