Monday, November 30, 2009

A Country With No Debt (And How It Got That Way)

By Alf Field

In February 2009 Zimbabwe was the only country in the world without debt. Nobody owed anyone anything. Following the abandonment of the Zimbabwe Dollar as the local currency all local debt was wiped out and the country started with a clean slate.

It is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.

Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products.

I recently visited Zimbabwe in the company of a leading Australian fund manager. As a student of monetary history, I was interested to see what had happened to a country that had suffered hyperinflation. How did the people cope? How is the country progressing now? The current Zimbabwean situation is complicated by the fact that President Robert Mugabe is determined to stay in power whatever the cost.

The first part of this article deals with economics, the hyperinflation and current situation, which is a picture of recovery and potential vigorous growth. The second part deals with politics, both the historical aspects as well as current developments, which are extremely fluid.

We were fortunate to have private interviews with the Prime Minister, Morgan Tsvangirai, and a wide range of business leaders. This provided a quick picture of Zimbabwe past and present.

There are common denominators in all hyperinflations. Generally government finances reach a point where large budget deficits cannot be financed by taxes or borrowings. The choices come down to austerity (with the government cutting back its spending) or by funding the deficit by creating local currency through the printing press, leading to the inflation tax. This is always a political decision, but the line of least resistance is the printing press. Cutting government expenditures and laying off bureaucratic staff is anathema to most politicians.

In Zimbabwe, Robert Mugabe has made it his mission to remain President for life. This has caused him to infiltrate his supporters into the army and police force. He also used Government finances as a way of funding patronage. His use of the printing press was liberal and nobody was prepared to stand up against him. This eventually led to inflation gathering momentum to the point where the armed forces were getting rebellious – they wanted more money. When Mugabe caved in to these demands, the Zimbabwe Dollar plunged.

Shortly after Mugabe was elected President in 1980, the Zimbabwe Dollar was worth more than the US Dollar. The ongoing abuse of the financial system eventually produced a runaway inflation. The largest bank note issued in Zimbabwe was for One Hundred Trillion Dollars...

Read the full fascinating account here.

(ViaLRC)

3 comments:

  1. Hyperinflation contributed to the abuse of their financial system.

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  2. Overall, an ideal country without debt is on a high level of efficient tax collection and wise spending. Thus eliminating the needs of budget deficits that will encourage foreign loans.

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  3. Well this is not true. The whole world owes an indescribable amount of money to itself. Even the most progressive and well developed countries do face many such problems.

    ReplyDelete