HYPERINFLATION

Hyperinflation is simply very high or abnormal rate or level of inflation. This is an enemy of many stakeholders in any economy beginning from genuine investors, suppliers, government, workers and should I simply say the general populace at large. In any given case, there are always winners and losers. Even in the case where an economy is “suffering” from hyperinflation, some smart business individuals can take advantage of prevailing economic conditions as a result of various weaknesses in fiscal and monetary policies during such difficult times. I will endeavor to cite some classic examples of how hyperinflation could be taken advantage of in business later in the article. However, in the case of salaried employees, they are the most hardly hit due to presence of minimal mitigation measures by employers such as implementation of commensurate salary adjustments as inflation soars.
For accounting purposes, management of any entity should exercise reasonable judgment to determine whether or not their functional currency is that of a hyperinflationary economy. This is very important because there are international financial reporting standards requirements that directly impact on hyperinflation (To be specific IAS 29) which should be applied whenever preparing financial statements under such circumstances.
The following are simplified indicators of hyperinflation:1. Cumulative inflation over 3 years is approaching or exceeds 100%2. Highly unstable prices for commodities3. Sky-rocketing prices4. General population prefers to keep its wealth in non-monetary assets (e.g. real estate) or ina relatively stable currency (e.g. USD, £, Pula etc)
Technical aspects

1. Where an entity’s functional currency is the currency of a hyperinflationary economy, the financial statements must be restated to take account of inflation.
2. All non-monetary assets and liabilities are restated to their current market value at the balance sheet date using an appropriate price index. (Price indices are normally available from Central Statistical Office in the case of Zambia and other economic watch groups such as JCTR etc)
3. Monetary items are not restated given they are already expressed in terms of the monetary unit current at the balance sheet date (although comparative amounts are restated by using yearly conversion factor)
4. The entity should in the period in which it identifies the existence of hyperinflation in the economy of its functional currency not having been hyperinflationary in the prior period, apply the requirements of IAS 29 (Reporting in hyperinflationary economies) as if the economy had always been hyperinflationary.
   Hyperinflation-The case of Zimbabwe

Clear indicators of hyperinflation in Zimbabwe are outlined below:

a) Inflation is highest in the world and stands at over 16,176%-Y2007(56.2%-Y2000-source: World Bank)-[“World record breaking inflation for Zimbabwe soars past 100,000%”, source: CNBC Africa, date:22/02/2008, time 07:10]

b) Very unstable foreign exchange rates [This discourages Foreign Direct Investment (FDI)] and as at two (2) weeks ago Z$7,000,000=1US$... (Z$55.05/1US$ in 2001-source: Encarta 2004)

c) Very high prices of commodities e.g.- a bag of mealie meal costs Z$180,000,000 (US$25.71 & ZMK102,840- ROE ZMK4,000/us$], source: Zimbabweans- a 2kg bag of sugar costs Z$35,000,000 (Us$5 & ZMK20,000)

d) Unemployment levels have surged to about 80%,Y2007-source: new African magazine (6%-Y1999, source: Encarta)

e) Drastic fall in GDP US$5.0billion-Y2006,source:worldbank (US$9.1 billion-Y2001, source: Encarta 2004)

f) Serious shortages of commodities & inputs such as fuel, food etc.

g) It is estimated that over 2 million Zimbabweans are estimated in the diaspora looking for greener pastures. (source: BBC)

The above economic indicators are a very big source of concern to any genuine African, for example the rate of inflation in Zimbabwe in the year 2000 was 56.2% (source: World Bank) compared to 100,000% (source: CNBC). This implies that local currency has lost its purchasing power and the monetary values (Pricing) of basic commodities are no longer in single digit but at least over six digits currently!

The exchange rate has also crushed from ZM$55.05=1US$(2001) to ZM$7,000,000(2007). In fact according to CNBC, the exchange rate has further gone up to ZM$15,000,000=1US$ as at this week. I wonder if this is also compensated by salary increases to locals because it simply means that the cost of living has gone up. On the other hand, business minded people can take advantage of these instabilities e.g. Importation of Mealie meal from Zambia at about K39,000 and reselling in Zimbabwe at K102,840 could make reasonable business sense.

It will take Zimbabwe ages to recover from this economic crisis. The country has the potential for economic prosperity given the intact infrastructure, abundant natural resources and rich human capital. In my opinion, all that could be needed in order for the economy to begin recovering from its “crashed” state, is re-aligning of economic fundamentals. Lastly, I personally believe that it is not a political regime change that has the answer to economic fortunes and recovery but rather the indigenous Zimbabweans themselves.
By Ansley Syanziba
The views expressed in this article are those of the author and Hardknocks takes no responsibility whether legal or professional.