The Broken Bolivar

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By: Farhah Aziz

Turn on your TV channels today or browse through your daily newspaper articles, stories about Venezuela’s crippling economy is omnipresent. There is no war or intense political conflict in Venezuela. Well, then why do we see miles-long queue of people purchasing basic goods or why thousands of Venezuelans are taking the risk of crossing the borders to seek a better life in neighboring Colombia or even the Portuguese-speaking Brazil? WHY IS THERE AN ECONOMIC COLLAPSE IN VENEZUELA?

Just a few years ago, Venezuela was cited to be one of the economic miracles of the Andean region. It essentially has the largest oil reserves in the world, even bigger than the one in Saudi Arabia. It was doing rather ok politically with the late socialist revolutionary strongman Hugo Chavez’s intense grip on power keeping everyone happy with stable and often soaring petrol price which helped lift many Venezuelans out of poverty.  Life was generally good. Even during the 2008 economic crisis plaguing the West, Venezuela was untouched.

Death by oil and other thing

Then, 2012 arrived and Venezuela just did not see it coming. The commodity market especially that of oil had to experience a rude awakening. The oil price dropped phenomenally by half from $100 barrel to a mere $50 a barrel. For an economy that was relying enormously (almost 96%) on petrol money and foreign debt to finance its colossal public spending, that was a huge blow financially to the state’s coffers. Plus, the passing of Chavez as well as the corruption legacies that he left behind for his protégé, Nicholas Maduro to inherit also did not help with the economic health of the South American country.

Apart from that, Chavez’s contempt towards capitalism which was manifested in his nationalization policy of almost 1200 private companies has left some of the financially-sound industries such as that of the profitable cane sugar to go bust. The once-richest country in South America also experienced a major trust deficit among investors and global lending institutions for its infamous reckless public spending, making it a high-risk debtor and cutting its access to international capitals.

With all of these miseries, one would ask how worse can it get? Well, a whole lot worse!

Hyperinflationary Tale of Woes

So, one would assume that Venezuela would have learnt

the lesson the hard way by taking the necessary measures of imposing austerity in the form of cutting the public spending, led by example perhaps first and foremost by the presidential palace. But, no!

Famous for its historical fiscal mismanagement, the government of Maduro had taken the path every legit economist and financial analyst had warned of coming close to especially if your financial track record has been patchy in the past.  It decided to print more Bolivars in order to pay off its mountains of debt and to boost domestic consumption.  Thus, the price levels skyrocketed and the same tale of hyperinflation ensued.

One would not expect Venezuela under Maduro out of all countries to be consistently transparent in publicly releasing its inflation rate. According to the IMF, the inflation level is expected to rise to 1,642 per cent this year while others predicted a spike of up to 2,200 per cent this year. Yes, that’s 4 digits in an inflation percentage.

To add insult to injury, Venezuela topped the misery index of 2013, a metric that summed up a country’s inflation and unemployment rate.

The Consequences

Just with any fiscal mismanagement at the hands of the government, the real payers of those bad policies are again the ordinary Venezuelans just wanting to survive another day. If just a few years ago, an ordinary middle-class Venezuelan family have the common financial concerns on how to pay off car or house loans, now they have to think of a way of how to get first in line to grab the highly-priced basic commodities such as sugar and rice rationed by the government and protected by armed guards.

Venezuela is a classic example of a nation that suffers no war or any real political instability but can simply shift from boom to bust because the government simply has too much say when it actually has very little relevant expertise. The story of Venezuela also demonstrates the volatility of the fiat monetary system that is not backed with any real store of value, thus rendering it worthless papers once, the public’s confidence has wavered. And boy how easily those Bolivars wavered eh?

Sources:

Venezuela releases new banknotes in cash crisis.

http://www.news.com.au/finance/economy/world-economy/venezuela-releases-new-banknotes-in-cash-crisis/news-story/29a3a193148226ad841621a0a9549a7c

Hunger and panic.

https://news.vice.com/story/venezuelas-continuing-currency-crisis-pushes-country-to-brink-of-collapse

Entering a ‘world of economic chaos,’ Venezuela struggles with hyperinflation.

http://www.miamiherald.com/news/nation-world/world/americas/venezuela/article120451593.html

 

The Chaos of Zimbabwean Currency Regime

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By: Farhah Aziz

January 20th, 2017

Zimbabwe; a landlocked country known for Victoria Falls, Robert Mugabe and indeed the hyperinflation crisis. Who hasn’t heard of the infamous phase of hyperinflation crisis plaguing the country in the late ‘90s stretching into early 2000s? The annual inflation rate was indeed extremely staggering with a record high, 500 billion per cent as of 2009, ranked the highest in the world.

So, what has caused this economic chaos to happen in the first place and where is this southern African economy heading to in the future?

“Indigenization” Policy of Mugabe

Zimbabwe is a relatively young nation, earning its independence from Great Britain in 1980. Formerly known as Rhodesia, the southern African nation bordering South Africa and Botswana is rich in mineral resources such as gold, copper and iron. At the time of independence, the country experienced rapid and healthy economic growth with 1 ZWD (Zimbabwean Dollar) being equal to 1 USD by emphasizing on export of its highly-prized natural commodities; particularly its thriving tobacco industry.

However, 1980 also saw the ascent of the then 56 year old, Robert Mugabe into power which has continuously ruled the country ever since. Mugabe was among many other negative adjectives associated to him, nonetheless a visionary man. He envisioned an independent Zimbabwe that possess an economy that is inclusive of all, most especially the majority Black population which was historically heavily marginalized economically under the British colonial policy which strongly favored the white population. The white population was granted farmlands and equipped with technical skills to run the Zimbabwean economy. Hence, Mugabe embarked on a wealth-distribution policy, by indigenizing the economy, something similar to the affirmative action policy of Malaysia, though very much a symbolic feature of Mugabe’s style.

The redistribution which took place in 2000 was marred by heavy violence, with forceful farmlands grabs and eviction policy imposed upon the white population by the authorities. Farmlands were then redistributed to the black population which was ill-equipped with technical skills necessary to maintain the productivity of the farms. As a result, the tobacco industry dwindled and the economy consequently stagnated, verging on the point of collapse.

Printing Money in Paying-off Debt

To remedy this, Robert Mugabe demanded the conventional financial assistance from the International Monetary Fund, therefore signing up to the subsequent Economic Structural Adjustment Program (ESAP), having to exercise fiscal prudence by cutting public spending and increasing tax rate. However, Mugabe’s government which was heavily riddled with corruption scandals coupled with the costly business venture in the neighboring DR Congo as well as the reluctance to adhere to ESAP has only dramatically reduced Zimbabwe’s capacity to pay off its debt that is only accumulating by the day. As of 2016, Zimbabwe owes the IMF, World Bank and Africa Development Bank a total of 9 billion USD.  This has resulted in an economic collapse in the form of chronic unemployment – 80% of its adult population is unemployed, a shrinking manufacturing sector and almost half of its population in dire need of food aid to survive.

Its non-compliance with the ESAP, delayed resettlement of its debt as well as the alleged corruptions scandal and violation of human rights, through the excess use of violence on peaceful protests were deemed sufficient for the imposition of economic sanctions by Western nations and financial institutions upon the nation.

To counter the economic impacts the sanctions had, Mugabe took a step that every decent economist warns of coming close to: printing more money. Lacking basic economic knowledge of such a step and perhaps fueled by his own ego, the increased amount of money in circulation meant that prices of goods and commodities dramatically spiked, causing hyperinflation. Take this, at one point; a single egg may cost you more than 1 billion ZWD.

Multi-currency Regime

Zimbabwe’s long-standing ruling party, the Zanu-PF, realized the magnitude of insane hyperinflation suffered by Zimbabwe and decided in 2009 that it’s time to call ZWD a day, although not definitely. A multicurrency system reigned with 9 currencies in circulation, the most popular being American dollar, South African Rand, the Euro as well as Chinese Yuan, Japanese Yen and Indian Rupee slowly gaining ground.

The multicurrency regime did not start in 2009. In fact, it has been used simultaneously with ZWD, predominantly in the black market even before the abandonment of ZWD due to their stabilities that tremendously help with import activities. However, there is a limited supply of them and before they knew it, they were running out of them.

Today, however, in a bid to ease the economic pressure and to boost exports, the Mugabe government has introduced another currency; the bond notes with an official exchange rate of 1:1 to the 1 USD.  The reaction of the population is somehow rather mixed with some of them applauding the government’s move to increase liquidity in the currency market while some are a bit more doubtful of the longevity of the currency and feared of the same hyperinflation chaos ravaging the country just a couple of years ago.

The Future of Zimbabwean Economy

Monetarists asserted that the worth of a currency relies primarily in the value and the faith that the people put in them. It is a bit like a belief system. Constructed out of thin air and not pegged to any mineral commodities as previously done with gold and silver, the value of money can fluctuate and can occur wildly so too, as demonstrated by the hyperinflation crisis of Zimbabwe.

The hyperinflation crisis suffered by the country shall serve to us a lesson that no, printing more money cannot solve your problem. In fact, it might only exacerbate it, again as exemplified by the economic collapse of Zimbabwean economy.

The real cost however is not paid by elitists such as Mugabe and his business mogul friends, but, by average hardworking citizen of Zimbabwe who might have to go by a day not eating, simply because they cannot afford the rise in price every 5 hours. This chaotic state of economy which stems from economic mismanagement and lack of fiscal discipline only creates more social and political instability in the form of street protests, anarchy and to some extent, may breed conflicts and wars.

The future of Zimbabwean economy essentially lies in its leaders taking more responsibilities in sorting out the mess that they’re in, rather than introducing a new currency or printing more money. And perhaps, it is about time that we see someone else holding the presidential post and unless real democracy is installed into the long-suffering country, the future of this country shall remain bleak and unpredictable.

Sources

ZIMBABWE’S NEW ‘CURRENCY’: WHAT YOU SHOULD KNOW ABOUT BOND NOTES. http://europe.newsweek.com/what-you-should-know-about-bond-notes-zimbabwes-new-currency-526003?rm=eu

How Bad Is Inflation in Zimbabwe? http://www.nytimes.com/2006/05/02/world/africa/02zimbabwe.html

Zimbabwe swaps hyperinflation for deflation with the use of US Dollar. https://www.ft.com/content/9eb1c2d8-c341-11e5-b3b1-7b2481276e45

New Zimbabwe Notes Stir Memory of 500,000,000,000% Inflation. https://www.bloomberg.com/news/articles/2016-10-21/new-zimbabwe-currency-stirs-memory-of-500-000-000-000-inflation

Mugabe launches new currency in ‘last gamble’ for Zimbabwe https://www.theguardian.com/world/2016/nov/28/mugabe-launches-new-currency-in-last-gamble-for-zimbabwe

A worthless currency. http://www.economist.com/node/11751346?story_id=E1_TTSVTPQG

Bitterness and unease in bankrupt Zimbabwe. http://news.bbc.co.uk/2/hi/programmes/from_our_own_correspondent/8551616.stm

Mugabe’s costly Congo venture. http://news.bbc.co.uk/2/hi/africa/611898.stm

Zimbabwe inflation hits new high. http://news.bbc.co.uk/2/hi/africa/7660569.stm

Zimbabwe’s multi-currency confusion. http://www.bbc.com/news/world-africa-26034078