The Accountant-May-June 2017

Economy
THE IMPACT OF
HYPERINFLATION
By Stephen Obock, sobock@kpmg.co.ke
A case of starving
millionaires
Inflation is the general increase in prices of
goods and services. Political, economic and
social factors in an economy may sometime
cause the prices of products and services
to increase or decrease significantly which
affects the general purchasing power of
money in an economy.
When the rate of increase in
inflation is very high over a long period
of time, an economy may end up being
hyperinflationary. Hyperinflation
occurs when an economy experiences
skyrocketing inflation that leads to a
significant loss of purchasing power of
individuals due to loss in real value of local
currency.
Hyperinflation causes the population
to minimize their holdings of local money
and switch to holding a relatively stable
foreign currency. Under such conditions,
the general price levels increases rapidly as
the official local currency quickly loses real
value such that to buy a unit of product/
service, you need more of the local
currency than you previously would.
A friend from Zimbabwe gave an
example where a 30-pound bag of
potatoes cost 90 million Zimbabwe
dollars in the first week of March 2009
and within two weeks, a similar bag was
costing 160 million Zimbabwe dollars.
Citizens needed to carry money in sacks
when going for shopping since they
needed more money due to Zimbabwe’s
skyrocketing inflation which was the
world’s highest in 2009, approximating
100,000% a year.
Hyperinflation is usually caused by
large persistent government deficits
financed primarily by creation of currency
rather than taxation or borrowing.
Hyperinflation is associated with wars,
their aftermath, sociopolitical upheavals,
or crises that make it difficult for the
government to tax the population. It is
often considered as a Man-Made Disaster
resulting to a steep devaluation of a
country’s currency which makes people to
hoard commodities. Basic goods, such as
food and fuel, become scarce, which sends
prices spiraling upward. In response, the
government is forced to print even more
money to stabilize prices and provide
liquidity, which only exacerbates the
problem. In the end, you end up having
many starving millionaires (in local
currency) because they have millions in
local currency but by the time they reach
the shop, the millions are worth very little
as was the case of the former Yugoslavia in
the 1990s.
Accounting in a
hyperinflationary economy
Financial statements portray the effects
of transactions and their economic
characteristics (assets, liabilities, equity,
14 MAY - JUNE 2017