Most countries seem to have finally whipped inflation—at least for now. But not everyone is celebrating the world’s impressive economic stability. In today’s List, FP takes a hard look at the soft currencies of some of the most unstable economies on the planet.
Currency: Somali shilling (SOS); Somaliland, an independent region not recognized by any country, also issues its own currency called the Somaliland shilling
Inflation rate: Nobody knows. Whatever it is, it’s not low.
Exchange rate: 1,387.77 SOS per US$1
What went wrong? Everything. It’s no surprise that the U.S. dollar and not the shilling is the Somalis’ currency of choice for large transactions and foreign trade. When the Somali state collapsed in 1991, the Central Bank of Somalia collapsed with it, along with the entire banking system. The Somaliland and Puntland regions developed their own versions of central banks, and what remains in the rest of the country is an informal monetary system run by speculators in outdoor markets like Bakaara, Somalia’s largest. With no central regulating authority, traders make up the rules and prices as they go along, and counterfeiting is rampant. When the defunct Central Bank stopped printing notes, private businessmen and warlords merely imported new shillings printed in Canada or Southeast Asia as needed. The World Bank estimates that as much as 80 percent of the currency in circulation is forged, reprinted, or new currencies. The worst part? The 1,000 shilling note is the only note available in some parts of the country, even though a cup of tea costs 500 shillings.
Currency: The new Iraqi dinar (NID)
Inflation rate: 40.92 percent in April 2007
Exchange rate: 1,260 NID per US$1
What went wrong? The war. In October 2003, the U.S. Coalition Provisional Authority introduced the New Iraqi Dinar to replace the old “Swiss” dinars that featured the likeness of ousted dictator Saddam Hussein. But the new design may have been the high point for the NID. Iraq’s inflation rate averaged 50 percent last year, as spiraling security costs and persistent shortages of gasoline fueled rampant inflation, while black market profiteers bid up the unofficial price of petrol. Struggling to keep inflation in check, Iraq’s beleaguered central bank allowed the dinar to appreciate by 14 percent and raised interest rates to 20 percent in December 2006. Inflation reached a peak of more than 66 percent in January 2007, but declined to a “mere” 40 percent in April. It’s an encouraging sign, but unless the country’s raging sectarian violence gets under control, not even Alan Greenspan will be able to turn Iraq’s economy around.
Currency: North Korean won (KPW)
Inflation rate: Who knows? Most prices, to the extent that they exist at all, are set by the central government.
Exchange rate: Officially, 141 KPW per US$1; 2,500 KPW/$ or higher on the black market
What went wrong? When was it ever right? Until the last few years, North Korean President Kim Jong Il had pegged North Korea’s currency at a rate of 2.16 won to the dollar—a ludicrously low peg given the worthlessness of the won. (It so happens that February 16 is the mercurial dictator’s birthday.) Even with the changed peg, though, experts say that North Korea’s official exchange rate bears no relationship to any underlying economic reality. That’s because, as the last Stalinist state on Earth, North Korea doesn’t have much of a market economy to speak of. And despite its official state ideology of self-sufficiency, juche, the North Korean regime must turn abroad for luxury items for its elites and for high-technology components for its military. But since the country exports little of value and nobody wants to be stuck with North Korean currency, the state has turned to weapons sales, drugs, counterfeiting, and other illicit activities in order to close the estimated $1.7 billion annual gap between its means and its hard currency needs. And now, the North Koreans have an inflation crisis on their hands. Prices skyrocketed beginning in 2002 as the government began experimenting with market reforms that untapped repressed inflation; the price of rice, for instance, rose by 550 percent. Meanwhile, the black market price for U.S. dollars has soared as the United States has applied a financial squeeze on the country. The minor role played by money in the North Korean economy mitigates the effects of hyperinflation to some extent, but even Kim Jong Il has to be quaking in his boots.
Currency: The bolívar (VEB)
Inflation rate: 19.5 percent as of May 2007
Exchange rate: Officially, 2,150 bolívars per dollar. But recently, the bolívar has been trading as high as 4,110 bolívars per U.S. dollar in the black markets.
What went wrong? With massive public spending fueling inflation and President Hugo Chávez’s nationalization campaign triggering a massive outflow of capital, it’s been a bad year for the bolívar. Thanks mainly to the high price of oil, many of Venezuela’s economic fundamentals look sound. But Venezuela’s currency has lost 21 percent of its value since January 2007, the worst performance of all 72 currencies tracked by Bloomberg News. Seeking to staunch the bleeding, Chávez has announced a bizarre series of measures, including imprisonment for those who violate price caps, removing three zeroes from the bolívar and renaming it the “strong bolívar” and—most bizarre of all—the reintroduction of 12.5-cent coin that Chávez promises will help whip inflation. When introducing the coin in March, he boasted, “We’re going to end monetary instability in Venezuela.”
Currency: Zimbabwean dollar (ZWD)
Inflation rate: 3,714 percent and rising
Exchange rate: Officially, 250 ZWD per US$1; unofficially, as high as 750 ZWD to the U.S. dollar
What went wrong? In a word, Mugabe. Even as neighboring African countries have prospered, Zimbabwe’s brutal and mercurial president, Robert Mugabe, has single-handedly taken a wrecking ball to his country’s economy. His economic mismanagement—most notably his disastrous land reform initiatives that began in 2000—has led to massive agricultural failure, severe commodity shortages, a flight of capital and skilled labor, and hyperinflation. The economy has shrunk by about 30 percent since 1999. The International Monetary Fund projects that Zimbabwe’s economy will contract by another 5.7 percent this year, and inflation will easily top 6,000 percent in 2008.