Mugabe’s monetized budget deficit: The epitome of Zimbabwe’s economic tragedy?

Abstract

This paper addresses two possible reasons for Zimbabwe’shyperinflationary environment at the beginning of 2007. Theinvestigation found that the main determinants of inflation inZimbabwe were parallel market premium movements and, especially,the change in money supply growth caused by quasi-fiscal-activities(QFA) carried out by the Reserve Bank of Zimbabwe. Furthermore,the paper suggests monetary systems that can be adopted byZimbabwe in order to restore economic stability and growth andreplace its failed experiment with central banking. The advantagesand drawbacks of various monetary regimes are reviewed, giventhat the present multicurrency system is considered to be a tentativeagreement. The paper argues that some form of official dollarizationwo u l d have substantial benefits. Arrangements using the Zim- dollaras the exclusive means of payment could be unstable in the absenceof substantial credibility.