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Thursday, 31 May 2007

Inflation in Zimbabwe

The ongoing blog discussions on Brendan Stone's treatise on Zimbabwe and the general state of Zimbabwe's economy have highlighted the importance of understanding different perspectives on the state of play. A key contested area between the Zimbabwean Government and some external observers relates to the 'true' nature of inflation in Zimbabwe.

I thought it useful therefore to share the two short working papers** produced in April 2007 by the IMF (same authors) - these are just one perspective on a complicated issue, but worth hearing what the folks in Washington have got to say.

The first paper Central Bank Quasi - Fiscal Lossess and High Inflation in Zimbabwe : A Note basically argued that inflation is running wild because the Central Bank is being forced to support Government policy by taking on functions that would be done else where through 'quasi fiscal' measures and keeping the currency over valued. In short Zimbabwe has resorted to printing money and issuance of central bank securing which has led to inflation going beyond 1000% in 2006.

The second paper Lessons from High Inflation Episodes for Stabilising the Economy in Zimbabwe puts the situation in Zimbabwe within a larger context of what happens in places of hyper inflation. The paper offers optimism noting that Zimbabwe's situation is not beyond redemption - "stylized facts show that in a successful stabilisation inflation tends to fall very rapidly while output recovers within the first or second year of stabilisation. Median inflation [of the sample of countries surveyed] fell from a peak of about 1,600% to 180% 12 months after the peak".

Both papers have recommendations on what Zimbabwe needs to do to get itself out of this mess, but I doubt that the Harare Government is listening. I'll let you decide whether they should be listening.

**Footnote - the papers are fairly readable and with some interesting graphs.

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