Major causes of inflation in Zimbabwe and southern africa in general and (possible solutions)

Essay by tmandiriza September 2004

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Inflation can be described as a tendency for the general price level to increase over a given time period. It can also be viewed as a case where too much money is chasing few goods. Inflation is usually measured by the Consumer Price Index (CPI) where a representative basket of consumer goods is analysed for changes in the price level over a defined time frame.

Generally, inflation results from demand pull, cost push and imported inflation. Demand pull arises due to supply side bottlenecks which will be outweighed by increased demand. Cost push inflation results when manufacturers and producers of goods and services pass the increases in the costs of production to their customers and this is reflected in the price increases. Imported inflation results from increased costs in the acquisition of forex and this will be passed to the customers as higher price.

Causes of Inflation in Zimbabwe since 1999

Rise in the international oil prices

The rise in the oil prices led to general increase in prices of most commodities in the country as fuel is a major input in most manufacturing and transportation sectors.

The rise in the oil prices occurred in the third and fourth quarter of 1999. Zimbabwe does produce oil, so it depended on imports, so an increase in the price on the international market as result of OPEC cartel agreements, will drastically increase prices of most goods and this is a classic example of imported inflation.

Fiscal deficits

Budget deficits have been increasing more rapidly since 1997 after payment of the war-veterans gratuities which were not budgeted for in the national budget. This was followed by the entry into the DRC war which was estimated to cost billions of dollars for the two year stay. The effect of high budget deficits as...