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There's more than meets the eye in Zimbabwe's inflation

The Zimbabwean dollar is stuck in a nosedive that it seemingly can not maneuver out of. Over fifteen years after inflation was officially made illegal in the sub-Saharan country, the Zimbabwean dollar has shown a further 26% decline in value after a foreign exchange auction last week, reflecting the long-term effects of excessively loose monetary policy, institutionalized corruption, and real supply shocks. As the local currency continues to get ditched for the US dollar in its home country, Zimbabwe’s treasury recently announced a series of measures attempting to salvage its value, including, “a directive that all government departments collect fees in the local currency, the introduction of a 1% tax on all foreign payments, and that most “customs duty be payable in local currency,” according to Reuters.

Firstly, it’s imperative to recognize the consequences of not only excessive inflation, but more importantly volatile and unexpected inflation, particularly in a developing economy such as Zimbabwe’s. The most obvious effect is that in the short-term, wages and affordability of life in the country is continuously playing catchup with consistently rising prices, jeopardizing financial health and investor confidence in the sub-Saharan nation. Specifically for the latter, while inflation may remain consistently high in Zimbabwe, it has also been volatile and unpredictable, discouraging investments and loans out of fear that price increases would chew into returns. This can be seen by observing foreign direct investment (FDI) as a percent of GDP in the country over the last few years. As inflation jumped from its flat line trend of around 10% in 2018 to an unbelievable 557% in 2020, the FDI share of GDP fell from 2.1% in 2018 to 0.7 percent in 2020. While in 2021 Zimbabwe’s FDI share of GDP was 0.6%, sub-Saharan Africa’s average rate was 3.9%, a difference of billions of dollars.

This translates to another predicament for Zimbabwe’s developing economy: the tradeoff between savings and consumption. A rapidly devaluing currency causes consumers to rapidly spend their money instead of saving it, as they try to avoid the opportunity cost of sitting on swiftly depreciating cash. While this proclivity for heavy consumption may prove healthy for Zimbabwe’s short-term economic growth, which has indeed jumped to 8.5% in 2021, it sacrifices long-term growth in the process, as consumers hardly engage in savings from which long-term investment is derived from. After all, a marquee example of success in developing economics is China’s rapid economic expansion over the last half-century. China systematically constrained the consumption share of GDP by ensuring that “businesses and government retained a disproportionate share of what was produced,” in the words of Michael Pettis with Foreign Affairs. Pettis observes a rate of Chinese domestic savings (again as a share of GDP) of upwards of 50% by the late 1990’s, and points to the Soviet Union in its 1950’s heights and post-World War II Japan as other successful examples of this tactic.

Promoting savings and investment, in other words, seems to serve as a beacon for developing economies’ hopes of long-term, sustainable growth, something that Zimbabwe is primed to miss out on if its inflation continues to fluctuate greatly at nonetheless high rates. Thus, there may be more than meets the eye when it comes to the repercussions of inflation in Zimbabwe. Contrary to public perceptions, the true cost to excessive inflation, at least in a developing economy, can be found in the long-term rather than the short-term, as it deprives the sub-Saharan country’s economy of the capital stock necessary to fund long-term investments. This, in turn, means that there’s all the more hanging in the balance as Zimbabwe attempts to reign in its inflationary problem.


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