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Zimbabwe Case
Zimbabwe Case
Zimbabwe Case
An interesting case on country risk
Experienced 7-digit inflation recently
USD
Unemployment
International
Question 1
What are the key elements of country
risk in Zimbabwe?
imbalance
Monetary instability
Absence of property rights
Exchange and price controls
Pervasive corruption
Absence of basic institutions of
government
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Question 2
How has increased country risk
affected economy and living
standards?
has nose-dived
Per capita income has plummeted
Galloping inflation
Acute shortage of basic necessities
Question 3
By how much is Zimbabwes currency ,
at its official rate, overvalued relative
to its black market rate?
Question 3 ( on currency
overvaluation )
Zimbabwes
currency overvalued by
nearly seven times, as follows:
Currency overvaluation = Black market
rate / official rate = 5500 / 824 = 6.67
times
Question:
What are the implications of an overvalued currency to the countrys
economy?
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Question 3 ( contd..)
Likely impact of currency
overvaluations:
Adverse impact on exports
Shortage of foreign exchange, preempting essential imports ( lifesaving drugs, imports needed by
export-oriented industries)
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Question 4
(2)
(3)
(4)
Erosion of
currency
value
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Question 4
This is how the flow chart might look like:
(1)
Large Budget
Deficits
(2)
Financed by
printing more
money
(3)
Galloping
inflation
(4)
Erosion of
currency
value
Questions
1 How do common people survive in
hyperinflationary conditions, such as
Zimbabwe in the recent past?
2 A country experiencing hyperinflation seeks your advice on
bringing inflation under control. What
advice would you give them? Is there
anything in the macro-economic
toolkit that might help?
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Geffry Sachs
Currency Board
Countrys
money stock
linked to its
stock of foreign
reserves
Free
convertibility at a
fixed rate of
exchange to the
anchor currency
( say the USD)
Questions
1 What happens if central bank sells USD 20 billion from reserves?
2 Would you contemplate a similar system for India?
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An Update on Zimbabwe
There has been some improvement in the last three years
Power-sharing and political stability
Economy slowly getting on track (GDP $ 13.66 billion,
growth 4.4%, Per capita $ 800, Inflation down to 8% )
Exports $ 3.144 billion, Imports $ 3.677 billion . Major
trading partners : S. Africa and China)
Use of Dollar, and South African Rand as legal tender
International organizations ( IMF, World Bank, others)
actively involved in helping the country turn-around
Foreign investment is beginning to come in. ( eg. Essar
Steel has plans to invest in steel and coal ( about $ 600
million )
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