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The Zimbabwe lesson: don’t print money!

Could SA ever turn out like Zimbabwe? Philip Haslam considers the question.

Could South Africa ever turn out like Zimbabwe? It’s a question I get a lot. While the hot-potato issue of land redistribution may appeal to those studying Zimbabwe, another key real interest story revolves around its money printing programmes, and how the country descended into hyperinflation.

In order to understand hyperinflation, I travelled to Zimbabwe to interview people from all walks of life – their stories are gripping. And so peculiar that it makes for interesting reading. One young Zimbabwean woman I interviewed said this: “You know, at school we studied the German hyperinflation of the 1920s. I remember thinking at the time: What a bizarre situation – who could possibly live like that? I would never have imagined that within a few short years we would be living life exactly as the Germans did, replete with wheelbarrows of money and empty stores. How wrong I was.”

Everyone in Zimbabwe during its hyperinflation were under severe pressure unlike anything they had ever experienced. The government had increasingly turned to rampant money printing as a funding alternative and as this newly printed money made its way into the markets prices began to rapidly rise.

As inflation skyrocketed, it placed unique pressures on businesses – revenue that companies made couldn’t compensate for the cost of restocking more expensive supplies later. This margin pressure is common in high inflation environments: the net result was that businesses began to close down. By 2006, all stores had emptied. Prices hurtled higher due to an even greater scarcity of goods and society morphed into a barter economy.

Transaction control

One of the foundations to any currency is that it must hold its value over time for it to continue to be traded. However, as the government voraciously printed money, the value of Zimbabwe dollars deteriorated and slowly people began to look for alternatives. This was obviously a problem for the government who needed pay for goods and services with newly printed cash.

As money printing escalated the government had to increase its control over the population to force everyone to use the new Zimbabwe dollars it had created, and to further keep prices low (in an attempt to shield the country from the resultant inflation). This state control grew to alarming levels culminating in state sponsored land-grabs, which only exacerbated the shortages.

Those in advantaged positions could still game the system, making a quick handling fee, buy assets or foreign currency. But as hyperinflation set in, trade began to cease. By this stage, there were shortages of all critical inputs. Fuel ran dry. There was no electricity. Water supplies were cut. Toilet paper and basic supplies were exceptionally difficult to find. Money printing made ordinary Zimbabweans very poor. By 2008, prices were rising on a daily basis with inflation eventually peaking at 89 700 000 000 000 000 000 000%. (89.7 sextillion per cent!). By the end of that year, the Zimbabwe dollar had collapsed and it crashed out of use, eleven years after the Black Friday of 1997.

Are there lessons for us?

So back to the question – “Could South Africa ever turn out like Zimbabwe?” The answer lies in the many hyperinflation episodes that have occured over the years.

In a recent analysis Professor Hanke and Kwok from John Hopkins University documented, 52
hyperinflations in the last 100 years. That’s an average of more than one hyperinflation every two years – it’s a little known statistic, but hyperinflation episodes are quite common. Most follow a fairly standard build up which my co-author Russell Lamberti and I discuss as follows in our book on Zimbabwe’s hyperinflation, When Money Destroys Nations:

“Typically, government spending increases to a point where it is a significant component of an
economy. It runs up large debts over a prolonged period and increasingly uses money printing as a source of funding. If debts keep mounting and are not paid off, a time comes when lenders lose confidence in the ability of the government to repay, and withdraw their financial support, resulting in financial panic and loss of value of the currency. At this stage, the government runs out of debt-funding alternatives, and the weaker currency causes the cost of imports to rise. The government then makes the political decision to use money printing as its primary form of financing after exploring all tax options available to it. This pushes the country down an inflation path that cascades into hyperinflation…”

Zimbabwe was a text book case study of this process. From the time of the country’s independence in 1980, debts within the country began to grow significantly. Then, at the end of 1997 the country experienced a debt crisis known as Black Friday, on the back of major expenses that the government had committed to. As funding alternatives evaporated, the government turned to money printing to pay for its excesses.

So where do we fit in with this path?

The South African Reserve Bank has not yet started printing large amounts of money to pay off the country’s debts. However the nation is growing its debts at a frightful pace, particularly as it consumes imports. In the last year alone, the country’s trade deficit was just under R84 billion. This deficit has had to be financed contributing to increasing levels of government debt. Currently, the total South African government and quasi-government debt excluding social security obligations is just over R2 trillion, add to that the R2.5 billion in corporate and individual debts, and the net sum is equivalent to every household in South Africa owing over R300 000 each!

In the next year, the South African government is expected to borrow a further R150 billion. The state sponsored entity Eskom is in the process of borrowing a further R250 billion. Our government is further planning major public works spending over the course of the next few years – all paid for using borrowed money. At every level the government is leaking money. Ominously, the credit rating of the country has deteriorated. In June, credit rating agency S&P downgraded South Africa’s rating to one level above junk-bond status. In September 2014, Moody’s downgraded its rating of the country. We haven’t yet had a debt crisis to activate large scale money printing programs. But South Africa’s debt options are running thin.

While this is all very concerning, South Africa’s debt problems pale in comparison to global debt issues. Most developed countries are using newly printed money to finance their expenses and pay off debts. Since 2008 the United States has printed over $3.5 trillion. In the last few weeks, Japan has amended its money programs – printing ¥80 trillion per year! Europe has recently announced a €1 trillion money printing scheme. All to pay off debts.

Watch this space. Zimbabwe’s lessons are plain and obvious. Debt and money printing have very real long term consequences. As these play out in South Africa and across the world, if money printing is the primary option used to repay obligations, things may look very much like they did in Zimbabwe during its hyperinflation.

Philip Haslam is the lead author of the book, When Money Destroys Nations, a book published by Penguin South Africa and co-authored by Russell Lamberti on how hyperinflation ruined Zimbabwe, how ordinary people survived and warnings for nations that print money.

He is a qualified chartered accountant and economic adviser, writer and speaker. As a speaker, he regularly presents to a variety of audiences on money, banking and the international financial system. Philip has lived in both Europe and America, and currently resides in his hometown of Johannesburg.

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