What is Hyperinflation?
Hyperinflation refers to a very high and rapidly increasing inflation leading to a continuous increase in prices, cost of goods and money supply. Some of the impacts are:
- Unprecedented increase in money supply which raises the prices of goods and services
- Diminishing value of the local currency
- Hoarding of essential commodities
- Political instability
- Lack of savings since all money is spent on meeting basic necessities
- Banks and lenders hit bankruptcy since loans lose their value
- Fall in tax revenue
- Imports are impacted since the value of foreign goods rise beyond control
Instances of Hyperinflation
- Venezuela: In 2014, the inflation was clocked at 69% but spiraled to 181% in 2015, and exceeded 4,000% in 2017. It was one of the highest oil producing nations in the world but the Government’s decision, post-2014, to print currency notes for decreasing oil revenues pushed the nation into a state of Hyperinflation.
- Zimbabwe: Post independence, the Government of Zimbabwe implemented poor economic policies and distributed land to the local people having no experience in agriculture. This severely impacted the output and heightened corruption causing erosion of wealth.
Furthermore, excessive currency printing during the Second Congo War worsened inflation levels and diluted the confidence in the political scenario of Zimbabwe. The inflation rate was estimated to be around 80 billion percent in 2008, following which the country halted the release of official inflation figures. The currency depleted to a point where local residents had to carry large bags of currency notes for purchasing products of daily use.
One of the immediate solutions is to impose cryptocurrencies, which is being done in the above 2 countries.
Benefits of introducing Cryptocurrencies in Hyperinflated Economies
- Imposing a cap on the total number of bitcoins in existence making it deflationary. It’s an alternative to printing additional currency notes. Once there is a fixed money supply, additional Bitcoin production is restricted.
- Enabling individuals and firms with an international presence to continue normal operations. For example, importers can use them for cross-border transactions. Family members can use them for sending remittances and avoid any restrictions imposed on FOREX.
- Having a better option for storing wealth in developing countries despite short-term fluctuations. In the long run, Bitcoins are expected to gain more value than most of the developing countries’ currencies. The U.S. Dollar is superior to most currencies, thereby making cryptocurrencies a viable option.
Steps to combat Hyperinflation
- Political situations have to be normalized which is highly critical for solutions to be smoothly implemented
- Fiscal policy can be modified by increasing taxation which will reduce spending and inflationary pressures
- Control the wage payments to workers, thereby reducing the disposable income of individuals
- Central Bank has to immediately swing in by controlling the money supply. They can hike interest rates, making borrowing expensive and savings more attractive
- It will also increase exchange rates making imports cheaper and reducing exports. Incentives can be offered for exporters to cut costs
- Post executing some efforts, the country can approach the IMF/World Bank for possible bailout packages. This can speed up the overall process
Hyperinflation is a grave problem and cannot be solved by implementing one solution. Multiple factors have to be considered while combating hyperinflation.
A combination of the above steps, along with co-operation from the citizens, can help the country in coming out of hyperinflation.
Since cryptocurrency can be misused, certain laws need to be imposed for it to successfully be used as a financial tool.