UNDERSTANDING THE ECONOMICS OF FINANCIAL CRISES

Financial crises can be caused by a variety of problems or factors, among them are excessive debt, poor regulation of the financial sector, bad government policy and government corruption.

Practical examples of countries that have in recent years been through severe financial crises are Greece, Venezuela, Lebanon and Zimbabwe.

The causes for each were different.

Zimbabwe and Venezuela fall under the same category because their crises were caused by bad government policy of nationalization that was compounded with international sanctions which crippled these economies.

Greece and Lebanon fall under the second category, which was due to excessive debt, Corruption and bad government fiscal policy.

It is in this second category that Zambia falls under.

Zambia’s crisis is at birth stage, the full effects are yet to reverberate and ripple through the economy, what we’re currently experiencing are just the birth pains.

WHAT HAPPENS IN A FINANCIAL CRISES?

Without going into too much detail, or causes of financial crises, the end results are always the same for ordinary citizens regardless of cause, we saw it in Greece, Lebanon, Venezuela and Zimbabwe.

1: The local currency loses value and becomes worthless, it can no longer be traded on forex markets because no one wants it.

2: A sharp and rapid increase in the cost of living, cost of food and essentials, this phenomenon is known as hyperinflation.

3: Tight liquidity in the market, money becomes scarce and government starts to restrict access to money, citizens are only allowed to withdraw a certain amount of money each day.

4: Collapse of the commercial banking sector as banks begin to close and people try to withdraw all their money, a phenomenon known as a Bank Run.

5:Job Losses and reduced GDP, shrinking of the economy as industries shut down due to non profitability, and currency instability which causes losses.

6: Fuel shortages as there’s no money to procure supplies.

7: The last and the worst result of a financial crises is food shortages. This is normally the most prolonged and painful effect that generally lasts several years.

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