There has been incessant turbulence in the Zimbabwean economy for years now. You find yourself again in trying times when hyperinflation is rampant. For many of you, this is reminiscent of the 2008 era. Zimbabwe is not typical; it is an atypical and abnormal operating environment. For the layman, it can be very hard to comprehend what is happening with the economy. If you follow the news or discussions by economic experts, you may get lost sometimes. This is because you will tend to hear somewhat complex or unfamiliar jargon. That makes exploring some of the common financial or economic terms you may have heard is necessary.
Hyperinflation
Hyperinflation is an excessive general increase in the prices of goods and services. This means that the respective currency being used will depreciate rapidly. Hyperinflation is often triggered by unchecked deficit expenditure. This kind of government spending is financed by excessive money printing. You may wonder how hyperinflation differs from inflation. Hyperinflation is when the general prices of goods and services increase by 50 percent or more monthly. This is often characterized by prices being changed several times a day.
Gross Domestic Product (GDP)
GDP is the value of a nation’s overall productivity of goods and services. GDP is a measure of economic growth, usually over a fiscal year. Bear in mind this excludes net income from abroad. Determining a nation’s GDP can be done in three common ways. It can be determined by how much money was spent, how many goods and services were sold, and how much profit was earned. There are several finer intricacies when it comes to GDP. However, getting into that can be complex. The general takeaway is that the higher the GDP, or the more it grows, the better.
Liquidity
Liquidity measures the extent to which a person or entity has cash to meet its immediate and short-term obligations. This also extends to how many assets a person or entity has that can be immediately converted to meet those obligations. Thus given our discussion, the entity would be the government. Regardless, liquidity is a broad term that you can even use personally. You may have probably heard someone saying something along the lines of ‘I am not liquid at the moment’.
Arbitrage
Arbitrage refers to profiting from differences in prices or yields in different markets. Arbitrage entails one buying something on one market and immediately selling it for a higher price on another. Just to give you an example in Zimbabwe. A business or company can access foreign currency through the auction system. That will be at favourably lower rates. Then they sell that foreign currency on the black or parallel at higher rates. That is one common example of arbitrage in Zimbabwe, but you get the idea.
Bank Run
A bank run denotes sudden and excessive cash withdrawals by depositors. This is usually triggered when depositors have lost confidence in the banking system or economy. For instance, recently, there was some speculation regarding US dollar accounts in Zimbabwe. Depositors feared that their account balances might be declared Zimbabwean dollar ones, something that has happened before. Scenarios like that trigger bank runs.
Money Markets
This refers to the network of banks, money dealers, institutional investors, and other financial entities that borrow and lend. This is in the short term, usually three months. You must understand that this differs from the stock market or stock exchanges. Money markets are chiefly informal and unregulated. If the borrowing and lending are long-term, they are called capital markets.
Subsidies
A subsidy is the government’s economic benefit or financial aid to support a desirable activity. Examples are tax allowances, duty rebates, or cash grants. Examples of desirable activities are exports, employment, and investments.
Keynesian Economics
When looking at the Zimbabwean economy, this is apparent. Keynesian economics is a macroeconomic theory that suggests that government must intervene to streamline the economy. Such intervention is by way of deciding government expenditure and taxation, amongst other things. This usually trumps the theory of free markets. Free markets are a system governed by supply and demand, not governmental interference.
By the way, macroeconomics refers to the economy in its entirety. For instance, when you hear that Zimbabwe’s GDP is this or that, or Zimbabwe’s unemployment rate is this or that. Those are macroeconomic aspects. Then you also need to know that microeconomics refers to the financial management approaches of individuals or entities. For example, consumer behaviour looks into microeconomic aspects.
Fiscal Policy
This set of rules and regulations stipulates the government’s expenditure and taxation dynamics. That is why you find fiscal policies tend to change from time to time. This is because they are usually meant to apply to specific periods. Broadly, fiscal policies can either be to contract or expand the economy. For example, a fiscal policy can significantly reduce taxation and increase government expenditure. That is a fiscal policy meant to expand the economy.
Then a fiscal policy can major in increasing taxation and lowering government expenditure. That is a fiscal policy meant to contract the economy. You may want to know then what a monetary policy is. These rules and regulations stipulate how the central bank controls the money supply and interest rates. Money supply refers to an economy’s cash or liquid assets. If the central bank increases the money supply, it triggers inflation.
Consumer Price Index (CPI)
Goods and services are priced at or cost something. That cost can change over time; it either goes up or down. CPI is the measure of how that cost changes over time. It measures that by comparing the prices of a basket of goods and services with their prices during the prior month or year. That is why in Zimbabwe, you will find the CPI continuously increasing. It is a clear sign that inflation is at play.
There are many financial and economic terms to know. These are just some of the common ones. They will give you a better understanding when you hear or engage in certain such discussions. Be curious to learn more terms.
