The 'new Zimdollar', hyperinflation

APPLIED economics professor Steve Hanke, has said that Zimbabwe is now experiencing hyperinflation for the second time in less than 10 years and has pointed out the creation of what he calls the "new Zim dollar" as the cause.

Hanke, with the help of research assistant, Erik Bostrom, has published a paper documenting Zimbabwe's latest inflation statistics as the 58th episode of hyperinflation in history.

Hanke's working paper titled Zimbabwe hyperinflates again: The 58th episode of hyperinflation in history is based on the concept that hyperinflation occurs when the monthly inflation rate reaches 50 percent per month and remains above that rate for at least 30 consecutive days.

The paper states that Zimbabwe's inflation breached this initial threshold on September 14, 2017 and remained above this rate past October 13, 2017.

"On October 13, 2017, Zimbabwe met all the criteria to qualify as an episode of hyperinflation. Specifically, Zimbabwe's monthly inflation rate exceeded 50 percent per month for 30 consecutive days," said Hanke.

In 2008, Zimbabwe suffered one of the world's worst episodes of hyperinflation in history.

In August 2008 the Reserve Bank of Zimbabwe (RBZ) reported an annual inflation rate of 231 million percent for the month of July and a 2 600,24 percent monthly inflation rate for the same month, the highest ever officially reported by the government.

There were no official reports for the rest of the year that year.

The IMF estimates that the southern African nation's annual inflation rate peaked in September 2008 at 500 billion percent.

Hanke calculated Zimbabwe inflation from August 2008 to November 14, 2008 and reported an annual inflation rate of 89,7 sextillion percent and a monthly rate of 79,6 billion percent which he argues is the second highest inflation rate ever recorded in the history.

The country abandoned the Zimbabwe dollar for a multicurrency system based on foreign currencies, but the US dollar became the major currency in the economy.

As the situation stabilised, the average annual inflation rate for 2009 was reported at 6,2 percent, annual inflation for 2015 was at -2,4 percent.

Inflation remained negative from then up until February this year when Zimbabwe Statistical Agency (Zimstat) reported positive inflation for the first time after two and a half years.

According to the RBZ, the inflation was caused by the increase of money in circulation as the country's fiscal deficit was financed largely from "domestic sources through the issuance of Treasury bills (TBs) and reliance on the Reserve Bank's overdraft facility".

Hanke refers to this increase of money supply as the creation of the "new Zim dollar".

"The government's creation of the New Zim dollar to finance its fiscal deficit has resulted in an explosion of the money supply," he said.

Hanke has described Zimbabwe's currency as being a single unit, which he calls the "new Zim dollar", made up of four elements.

"It has four major components: Physical US dollars, bond notes, electronic real time gross settlements (RTGS), and TBs. Apart from physical USD, the additional three components have acted to massively increase the money supply in Zimbabwe, broadly measured," reads one of Hanke's articles in his latest offering on Zimbabwe.

Hanke has since amended the Hanke Krus World Hyperinflation Table once again, adding a 58th entry: Zimbabwe's 2017 episode of hyperinflation, the table which first emerged when Hanke was invited to write a survey article for The Routledge Handbook of Major Events in Economic History in 2013.

The table contained every country that had experienced hyperinflation, 56 in total.

Since its first publication, the table was first amended in December 2016 to include Venezuela as the 57th entry and this latest amendment brings the total number of entries to 58.

The current entry appears at the 29th rank.

Zimbabwe now appears in the table twice and the current entry is listed as an "ongoing" hyperinflation occurrence with the currency of the territory listed as "new Zim dollar" in the table.

Forty-three of the 58 entries are based on standard consumer price indexes, eight are based on wholesale price indexes, five on calculations based on exchange rates and two entries are based on calculations based on implied exchange rates (the two entries involving Zimbabwe).

Highest monthly inflation during the "ongoing hyperinflation occurrence" is listed at 185 percent and the time required for prices to double is listed at 20,1 days.

As of October 25, Hanke reported Zimbabwe's monthly inflation rate at 77 percent and the annual rate at 348 percent.

Zimbabwe's hyperinflation was determined by using a method he established in 2008 when he measured Zimbabwe's inflation from August 2008 to 14 November 2008.

"Using the implied exchange rate (the Old Mutual Implied Rate), we are once again able to apply Purchasing Power Parity (PPP) to calculate an accurate measurement of Zimbabwe's inflation rate," Hanke said.

The method applies the PPP, a classic economic theory that attempts to quantify the relationship between inflation rates and currency exchange rates across different territories or economies.

Hanke uses the Old Mutual Implied Rate (OMIR) as a proxy for the exchange rate between the US dollar and the currency used in Zimbabwe which he refers to as the "new Zim dollar".

The OMIR measures the disparity of the price of the Old Mutual shares across different exchanges, the Zimbabwe Stock Exchange (ZSE) and the London Stock Exchange (LSE), meaning that if the Old Mutual shares are trading at US$1 on the LSE and US$5 on the ZSE then the exchange rate between the US dollar and the currency used in Zimbabwe must be 1:5.

Hanke's work on Zimbabwe's inflation is largely based on the OMIR.

In his 2008 paper on Zimbabwe's hyperinflation titled On the measurement of Zimbabwe's hyperinflation, Hanke studied Zimbabwe's 2008 hyperinflation phase citing the termination of official inflation reports as the point of need for the use of the OMIR to cover the gap.

He has, however, not made it clear why he is using the implied rate in the current working paper when government is currently regularly reporting inflation.

He only states that government's reporting is unreliable without pointing out anything specific to justify an independent reporting of the inflation statistics.

In his initial application of the OMIR in 2008, Hanke cross-checked the OMIR with the Zimbabwe dollar/US dollar black-market prices and concluded that it ould be used as a proxy for the black-market exchange rate.

There is, however, no evidence of the same testing in his current work.

Some local analysts have downplayed the relevance of the OMIR as a direct proxy for the local currency discount, citing the high demand of equities in Zimbabwe as adding to the Old mutual stock premium over and above the discount of the currencies used in Zimbabwe.

In 2008, during the later stages of the hyperinflation phase, the OMIR was used as an indicator for the exchange rate between the Zimbabwe dollar and the US dollar by the informal markets, which at that time dominated foreign exchange in the country.

Some believe that the use of the OMIR in the informal markets during that time motivated the then reserve bank governor, Gideon Gono to issue regulations that were blamed for having forced the ZSE to shut down.

"The whole economy was then being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself," said Gono in a press statement announcing the regulations.

In mid-October Zimstat indicated that the annual inflation rate for the month of September was at 0,78 percent, Hanke has dismissed this figure saying that government's statistics are unreliable.

"Readers can forget this truly fantastical piece of artwork. They can also forget the International Monetary Fund's Zimbabwe inflation rate predictions. In its most recent forecast, which is contained in the October 2017 World Economic Outlook, the IMF predicts only modest inflation for Zimbabwe. Both the Government of Zimbabwe and the IMF are way wide of the mark, if not delusional, when it comes to Zimbabwe's inflation rate," said Hanke.

Some local economists have also expressed similar sentiments with Zimbabwe National Chamber of Commerce chief executive, Chris Mugaga, saying that the inflation may be understated.

He contends that the way Zimstat measures inflation might not be the most appropriate for the prevailing situation in the country.

"The issue is with weights, the problem is that the statistics are collected in maybe TM or Spar, but the real economy is out there where people are demanding cash and premiums for non-cash transfers. I think if you factor that into the equation you will find that the inflation is actually higher than what has been officially stated," Mugaga said.

While Mugaga expressed confidence that Zimstat was following international standards, he, however, emphasised that the methodology needs to be revised to reflect the environment.

"Following international standards in terms of measuring the CPI, I know Zimstat does that, but how does that do in terms of capturing inflation in our non-typical environment of the three tier pricing system. We cannot continue to rely on straight jacket means of measuring inflation," he said.