Monday, March 23, 2009 0 comments ++[ CLICK TO COMMENT ]++

Zimbabwe slays hyperinflation dragon

Two interesting articles from The Globe & Mail today. I'll cover the first one in this post.

It looks like Zimbabwe is in the early stages of getting their hyperinflation under control. The opposition party gained some power a few months ago and this has led to radical changes in policy. It's not clear if these policies will be opposed by Mugabe's party in the future, but so far so good. As to be expected, hyperinflation was pursued largely for political reasons rather than anything economic. Nearly every single episode of hyperinflation was due to purposeful actions. Even the infamous German Weimar Republic hyperinflation in the early 1920's was purposely undertaken.

Also disappearing is Zimbabwe's phenomenal level of hyperinflation, which last year reached a stunning 89.7 sextillion per cent (a number expressed with 21 zeroes), making it the most extreme hyperinflation crisis of any country in modern times.

Zimbabwe's new coalition government has cracked both problems with an absurdly simple solution: It has abruptly switched to foreign currencies, allowing customers to pay for products with U.S. dollars or South African rand or Botswana pula.

The entire economy, almost overnight, has switched to a unique system of multiple foreign currencies.

Equally swiftly, hundreds of Zimbabwe's long-closed shops and groceries have reopened, retail licence fees have been slashed, and the new competition has reduced prices to stable levels.

Make no mistake about it: no other country comes anywhere near the inflation experienced in Zimbabwe. The figure is truly mindboggling, especially when you consider the fact that there wasn't a war or any other foreign debt that forced the government to pursue hyperinflation.

Dollarization seems to have killed off inflation but the question is whether the political climate is stable enough to maintain it.

Those goods are still unaffordable for many people, of course. The unemployment rate is estimated at 94 per cent, wages are often unpaid, and the vast majority of people are dependent on donated food rations.

Not surprisingly, there is a severe shortage of the foreign money. Shops don't have enough foreign cash to provide change to customers, so they issue "credit notes" on little bits of paper - or persuade their customers to accept change in candies.

I'm not sure if the 94% unemployment rate is correct. In a strict sense it is probably correct but I also suspect that it doesn't count anyone working in the black market or the grey market. It is likely that the vast majority of the population works in the underground economy. Developing countries also tend to underestimate the GDP contribution from rural areas which often aren't measured properly (this is the case in countries like China and India as well.)

It's interesting how the free market forces have rapidly adjusted to stabilize the economy. Perhaps with the opening of shops and the like, the economy will prosper.

Investors, including Canadians, are watching closely. Toronto-based Caledonia Mining Corp., which suspended production at its Blanket gold mine in Zimbabwe last October, is considering a reopening of the mine within the next few weeks because the new government is promising that producers can export a much higher percentage of their production. The mine could produce up to 40,000 ounces per year.

Someone that wants to make a highly speculative bet might want to consider that company. I don't know anything about it but it is listed on the TSX under the symbol CAL, and on the US OTC market as CALVF. The company has been losing money for ages and might go bankrupt any minute now but it's something to research for the commodity bulls contemplating betting on Zimbabwe.


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