Hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe was a period of currency instability in Zimbabwe that, using Cagan's definition of hyperinflation, began in February 2007. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe's hyperinflation because the government of Zimbabwe stopped filing official inflation statistics. However, Zimbabwe's peak month of inflation is estimated at 79.6 billion percent month-on-month, 89.7 sextillion percent year-on-year in mid-November 2008.
In 2009, Zimbabwe stopped printing its currency, with currencies from other countries being used. In mid-2015, Zimbabwe announced plans to have completely switched to the United States dollar by the end of 2015. In June 2019, the Zimbabwe government announced the reintroduction of the RTGS dollar, now to be known simply as the "Zimbabwe dollar", and that all foreign currency was no longer legal tender. By mid-July 2019 inflation had increased to 175% sparking concerns that the country was entering a new period of hyperinflation. In March 2020, with inflation above 500% annually, a new taskforce was created to assess currency issues.
On 18 April 1980, the Republic of Zimbabwe was born from the former British colony of Southern Rhodesia. The Rhodesian Dollar was replaced by the Zimbabwean dollar at par value. When Zimbabwe gained its independence, the newly introduced Zimbabwean dollar was initially more valuable than the United States dollar at the official exchange rates. But this did not reflect reality, as in terms of purchasing power on the open and black markets, it was less valuable, due primarily to the higher inflation in Zimbabwe. In its early years, Zimbabwe experienced strong growth and development. Wheat production for non-drought years was proportionally higher than in the past. The tobacco industry was thriving as well. Economic indicators for the country were strong.
From 1991 to 1996, the Zimbabwean ZANU-PF government of president Robert Mugabe embarked on an Economic Structural Adjustment Programme (ESAP) that had serious negative effects on Zimbabwe's economy. In the late 1990s, the government instituted land reforms intended to evict white landowners and place their holdings in the hands of black farmers. However, many of these "farmers" had no experience or training in farming. From 1999 to 2009, the country experienced a sharp drop in food production and in all other sectors. The banking sector also collapsed, with farmers unable to obtain loans for capital development. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%. Life expectancy dropped. The Reserve Bank of Zimbabwe blamed the hyperinflation on economic sanctions imposed by the United States of America, the IMF and the European Union. These sanctions affected the government of Zimbabwe, asset freezes and visa denials targeted at 200 specific Zimbabweans closely tied to the Mugabe regime. There were also restrictions placed on trade with Zimbabwe, by both individual businesses and the US Treasury Department's Office of Foreign Assets Control.
A monetarist view is that a general increase in the prices of things is less a commentary on the worth of those things than on the worth of the money. This has objective and subjective components:
- Objectively, that the money has no firm basis to give it a value.
- Subjectively, that the people holding the money lack confidence in its ability to retain its value.
Crucial to both components is discipline over the creation of additional money. However, the Mugabe government was printing money to finance military involvement in the Democratic Republic of the Congo and, in 2000, in the Second Congo War, including higher salaries for army and government officials. Zimbabwe was under-reporting its war spending to the International Monetary Fund by perhaps $23 million a month.
Another motive for excessive money creation has been self-dealing. Transparency International ranks Zimbabwe's government 157th of 177 in terms of institutionalised corruption. The resulting lack of confidence in government undermines confidence in the future and faith in the currency.
Economic mis-steps by government can create shortages and occupy people with workarounds rather than productivity. Though this harms the economy, it does not necessarily undermine the value of the currency, but may harm confidence in the future. Widespread poverty and violence, including government violence to stifle political opposition, also undermines confidence in the future. Land reform lowered agricultural output, especially in tobacco, which accounted for one-third of Zimbabwe's foreign-exchange earnings. Manufacturing and mining also declined. An objective reason was, again, that farms were put in the hands of inexperienced people; and subjectively, that the move undermined the security of property.
Government instability and civic unrest were evident in other areas. Zimbabwean troops, trained by North Korean soldiers, conducted a massacre in the 1980s in the southern provinces of Matabeleland and Midlands, though Mugabe's government cites guerrilla attacks on civilian and state targets. Conflicts between the Ndebele ethnic minority and Mugabe's majority Shona people have led to many clashes, and there is also unrest between blacks and whites, in which the land reform was a factor. An aspect of this reform that seeks to bar whites from business ownership induced many to leave the country.
The Reserve Bank of Zimbabwe responded to the dwindling value of the dollar by repeatedly arranging the printing of further banknotes, often at great expense from overseas suppliers. On 1 March 2008, it was reported that documents obtained by The Sunday Times showed that the Munich company Giesecke & Devrient (G&D) was receiving more than €500,000 (£381,562) a week for delivering bank notes equivalent to Z$170 trillion a week. By late 2008, inflation had risen so high that automated teller machines for one major bank gave a "data overflow error" and stopped customers' attempt to withdraw money with so many zeros.
In Zimbabwe, neither the issuance of banknotes of higher denominations nor proclamation of new currency regimes led holders of the currency to expect that the new money would be more stable than the old. Remedies announced by the government never included a believable basis for monetary stability. Thus, one reason the currency continued to lose value, causing hyperinflation, is that so many people expected it to.
Zimbabwean inflation rates since independence (official up to Jul. 2008, estimates thereafter)
Over the course of the five-year span of hyperinflation, the inflation rate fluctuated greatly. At one point, the US Ambassador to Zimbabwe predicted that it would reach 1.5 million percent. In June 2008 the annual rate of price growth was 11.2 million percent. The worst of the inflation occurred in 2008, leading to the abandonment of the currency. The peak month of hyperinflation occurred in mid-November 2008 with a rate estimated at 79,600,000,000% per month. This resulted in US$1 becoming equivalent to the staggering sum of Z$2,621,984,228.
On 13 July 2007, the Zimbabwean government said that it had temporarily stopped publishing (official) inflation figures, a move that observers said was meant to draw attention away from "runaway inflation which has come to symbolise the country's unprecedented economic meltdown". In 2008, the inflation rate accelerated dramatically, from a rate in January of over 100,000% to an estimated rate of over 1,000,000% by May, and nearly 250,000,000% in July. As predicted by the quantity theory of money, this hyperinflation was linked to the Reserve Bank of Zimbabwe's choice to increase the money supply.
Old Mutual Implied rate
As hyperinflation accelerated, the value of the Zimbabwe dollar declined rapidly against other currencies, yet official exchange rates published by the Reserve Bank of Zimbabwe were infrequently updated; this made it impossible to tell from an official source how much the Zimbabwe dollar was really worth against other currencies on a particular day, which in turn disrupted international business transactions involving Zimbabwe dollars. Staff from WM/Reuters devised an indirect means of measurement that was termed the Old Mutual Implied Rate (OMIR). This took the daily price of shares in the insurance company Old Mutual that traded in the London and Harare stock markets and derived from it a national daily exchange rate between the Zimbabwe dollar and the pound. Shares had much less strict capital controls than through the Zimbabwe banking system, so the shares were used as a vehicle for moving capital between currencies by buying stock in either London or Harare and then selling in the other location.
The Old Mutual Implied rate was a widely adopted benchmark rate for unofficial currency exchange until intervention by the Reserve Bank of Zimbabwe in May 2008 prohibited the transfer out of the country of shares in Old Mutual, ABC and Kingdom Meikles Africa, thereby blocking their fungibility.
Use of foreign currencies
In 2007, the government declared inflation illegal. Anyone who raised the prices for goods and services was subject to arrest. This amounted to a price freeze, which is usually ineffective in halting inflation. Officials arrested numerous corporate executives for changing their prices.
In December 2008, the Reserve Bank of Zimbabwe licensed around 1,000 shops to deal in foreign currency. Citizens had increasingly been using foreign currency in daily exchanges, as local shops stated fewer prices in Zimbabwe dollars because they needed foreign currency to import foreign goods. Many businesses and street vendors continued to do so without getting the license.
In January 2009, acting Finance Minister Patrick Chinamasa lifted the restriction to use only Zimbabwean dollars. This too acknowledged what many were already doing. Citizens were allowed to use the US dollar, the euro, and the South African rand. However, teachers and civil servants were still being paid in Zimbabwean dollars. Even though their salaries were in the trillions per month, this amounted to around US$1, or half the daily bus fare. The government also used a restriction on bank withdrawals to try to limit the amount of money that was in circulation. It limited cash withdrawals to $Z500,000 which was around US$0.25.
The black market
Prices in shops and restaurants were still quoted in Zimbabwean dollars, but were adjusted several times a day. Any Zimbabwean dollars acquired needed to be exchanged for foreign currency on the parallel market immediately, or the holder would suffer a significant loss of value. For example, mini-bus drivers were required by law to only accept payment from passengers in Zimbabwean dollars, but at increasing rates throughout the day: the evening commute was therefore highest-priced ride of the day, with the next morning's price higher still. A driver might have to exchange money three times a day, not in banks but in back office rooms and parking lots.
Such business venues constituted a black market, an arena explicitly outside the law. Transactors could evade the price freezes and the mandate to use Zimbabwean dollars. The black market served the demand for daily goods such as soap and bread, as grocery stores operating within the law no longer sold items whose prices were strictly controlled, or charged customers more if they were paying in Zimbabwean dollars. At one point, a loaf of bread was Z$550,000,000 in the regular market, when bread was even available; apart from a trip to another country, the black market was the only option for almost all goods, and bread might cost Z$10,000,000,000.
At independence in 1980, the Zimbabwe dollar became the common currency. Originally, the paper notes were in denominations of Z$2, 5, 10 and 20, and coins in denominations of 1, 5, 10, 20, 50 cents and Z$1. As larger bills were needed to pay for menial amounts, the Reserve Bank of Zimbabwe planned to print and circulate denominations of up to Z$10, 20, 50, and 100 trillion. Announcements of new denominations were increasingly frequent; the Z$200,000,000 bill was announced just days after the printing of the Z$100,000,000 bills.
The government did not attempt to fight inflation with fiscal and monetary policy. By 2003, there were growing shortages. In 2006, before hyperinflation reached its peak, the bank announced it would print larger bills to buy foreign currencies. The Reserve Bank printed a Z$21 trillion bill to pay off debts owed to the International Monetary Fund.
On three occasions, the Reserve Bank of Zimbabwe redenominated its currency. First, in August 2006, the Reserve Bank recalled notes in exchange for new notes with three zeros slashed from the currency. In July 2008, the governor of the Reserve Bank of Zimbabwe, Gideon Gono, announced a new Zimbabwean dollar, this time with 10 zeros removed. The Z$10 billion would be redenominated to be Z$1. This move was not just to slow inflation but also to make computations more manageable.
A third redenomination, producing the "fourth Zimbabwe dollar," occurred in February 2009, and dropped 12 more zeros from the currency. It was thus worth 10 trillion trillion original dollars, as the three redenominations together reduced the value of an original dollar by 103 × 1010 × 1012 = 1025. Computers could not handle the amount of zeros such that other forms of money had to be used to act as normal money (bearer’s cheques). Banks had to input a lesser amount on the deposit or withdrawal slip then would put a covering statement, such as “multiply by 1 000 000 or add 10 zeros to your amount to get the real value”. The same was true for businesses as well and all traders.
A solution effectively adopted by Zimbabwe was to adopt some foreign currency as official. To facilitate commerce, it is less important which currency is adopted than that the government standardise on a single currency. The US dollar, the euro, and the South African rand were candidates; the US dollar had the most credibility and was the most widely traded within Zimbabwe. Zimbabwe could have joined the nearby nations of Lesotho, Namibia, South Africa, and Eswatini, which constitute the Common Monetary Area, or "Rand Zone" by formally deciding to use the rand to promote trade and stability.
In 2009, the government abandoned printing Zimbabwean dollars at all. This implicitly solved the chronic problem of lack of confidence in the Zimbabwean dollar, and compelled people to use the foreign currency of their choice. Since then Zimbabwe has used a combination of foreign currencies, mostly US dollars.
In 2014, the Reserve Bank of Zimbabwe unveiled "convertible" coins in denominations of US$0.01 through US$0.50. The Bank said that 80% of Zimbabweans use the U.S. dollar, and said the local lack of coins induces retailers to round prices up to the next higher dollar. The coins extend the use of the dollar as a de facto currency, and indeed the National Bank has repeatedly assured that it does not intend to bring back a national currency. As of May 2016 the liquidity of the USD had rapidly decreased and John Mangudya, the governor of the Reserve Bank of Zimbabwe, said Zimbabwe would print a new bond note, which he was said would be at par with the American dollar. This was to be done within the following two months. Some citizens disputed this, saying the 2008 error was now returning and they would not accept the bond notes.
In June 2015, the Reserve Bank of Zimbabwe said it would begin a process to "demonetize" (i.e., to officially value a fiat currency at zero). The plan was to have completed the switch to the US dollar by the end of September 2015. In December 2015, Patrick Chinamasa, the Zimbabwe Minister of Finance, said they would make the Chinese yuan their main reserve currency and legal tender after China cancelled $40 million in debts. However, this was denied by the Reserve Bank of Zimbabwe in January 2016. In June 2016, nine currencies were legal tender in Zimbabwe but it was estimated 90% of transactions were in US dollars and 5% in Rand.
Return of hyperinflation
In 2019, the new Finance Minister, Mthuli Ncube, presided over the conversion from foreign currency to a new Zimbabwean currency, and the resultant return of hyper-inflation. It was estimated that inflation reached 500% during 2019. According to Trading Economics "The annual inflation rate in Zimbabwe was 540.2 percent in February of 2020."
- "Hanke S., & Kwok, A. (2009) "On the Measurement of Zimbabwe's Hyperinflation", Cato Journal, 29 (2)" (PDF). Retrieved 11 July 2015.
- "Zimbabwe Abandons Its Currency". BBC. 29 January 2009.
- McGee, Patrick (12 June 2015). "Zimbabwe ditches its all but worthless currency". FT. Archived from the original on 11 July 2015. Retrieved 2 February 2016.
- Sguazzin, Anthony. "Zim's dollar returns, a decade after it became worthless". Fin24. Retrieved 25 June 2019.
- Samaita, Kevin (15 July 2019). "Zimbabwe's inflation doubles up to 175%". BusinessLIVE. Retrieved 16 July 2019.
- Muronzi, Chris (16 July 2019). "Could new figures forecast hyperinflation for Zimbabwe?". www.aljazeera.com. Retrieved 16 July 2019.
- Ndlovu, Ray; Goko, Colleen (11 March 2020). "Zimbabwe Turns to 'Task Force' in Bid to End Currency Rout". Bloomberg News. Archived from the original on 19 March 2020.
- "Government sets up currency stabilisation task force". The Herald. Harare, Zimbabwe. 11 March 2020. Archived from the original on 12 March 2020.
- "Zimbabwe: A Worthless Currency". The Economist. 17 July 2008. Retrieved 17 April 2010.
- "The Death of the Zimbabwe Dollar". Global Financial Data. 24 January 2018. Retrieved 17 April 2010.
- "Whose land?". The Economist. 5 March 2009. Retrieved 5 August 2017.
- Marshall Auerbeck. "Will the US turn into a modern day Weimar Germany?" (PDF). Netrootmass.net. Retrieved 19 November 2012.
- Coltart, David (2008). "A Decade of Suffering in Zimbabwe". CATO.
- Illegal Sanctions to Blame for Economic Challenges – Mutasa The Herald (Harare)
- S. 494 (107th): Zimbabwe Democracy and Economic Recovery Act of 2001 SEC. 4. SUPPORT FOR DEMOCRATIC TRANSITION AND ECONOMIC RECOVERY. See Section 4C.
- EU renews Zimbabwe sanctions, By Sebastien Berger, The Telegraph, 16 February 2010.
- Office of Foreign Asset Control, US Treasury Department PROHIBITED TRANSACTIONS
- See, for instance, Friedman, Milton. Inflation: Causes and Consequences. New York: Asia Publishing House: "Inflation is always and everywhere a monetary phenomenon."
- "Mugabe's Costly Congo Venture". BBC Online. 25 July 2000. Retrieved 19 April 2011.
- e.V., Transparency International. "Transparency International – Country Profiles".
- "Corruption Index". Transparency International. Retrieved 19 April 2011.
- "The Economies of Violence". The Economist. 14 April 2011. Retrieved 17 April 2011.
- Capie, Forest (1986). "Conditions in which very Rapid Hyperinflation has occurred". Carnegie-Rochester Conference Series on Public Policy. 24: 115–168. doi:10.1016/0167-2231(86)90007-2.
- Latham, Brian (3 May 2010). "North Korea Soccer Team May Face Zimbabwe Massacre Protests". Business Week Online. Retrieved 17 April 2011.
- "Bitterness and unease in Bankrupt Zimbabwe". BBC Online. 6 March 2010. Retrieved 19 April 2011.
- "Zimbabwe Inflation Over 900 Percent". ParaPundit. 4 May 2006.
- Meldurm, Andrew (21 February 2006). "Africa needs more courage, says Mugabe". The Guardian.
- "Zimbabwe: Gono ordered to print Z$1 Trillion for Civil servants and Army". Zimbabwe Daily News. 28 June 2007. Archived from the original on 6 July 2007 – via The Zimbabwe Situation.
- "Mugabe says will print more money if there isn't enough". International Herald Tribune. Associated Press. 28 July 2007. Archived from the original on 29 September 2007 – via The Zimbabwe Situation.
- "RBZ provides $3 trillion for vote buying". The Zimbabwean. 30 August 2007. Archived from the original on 5 September 2007 – via The Zimbabwe Situation.
- Lamb, Christina (2 March 2008). "Planeloads of cash prop up Mugabe". The Sunday Times. Archived from the original on 2 January 2010 – via The Zimbabwe Situation.
- "Giesecke & Devrient halts deliveries to the Reserve Bank of Zimbabwe". Giesecke & Devrient GmbH, Prinzregentenstr. 1 July 2008. Archived from the original on 19 November 2016. Retrieved 21 June 2019.
- "$100 billion for three eggs". The Herald Sun. 25 July 2008. Archived from the original on 10 September 2012. Retrieved 21 June 2019.
- Coltart, David (24 March 2008). "A Decade of Suffering in Zimbabwe". The Cato Institute.
- Krugman, Paul F (2005). International Economics; Theory and Policy. Pearson. pp. 363–366.
- Christiano, Lawrence (February 1987). "Cagan's Model of Hyperinflation Under Rational Expectations". International Economic Review. 31 (1).
- Martin Kadzere (9 October 2008). "Zimbabwe: Inflation Soars to 231 Million Percent". allAfrica.com / The Herald (Harare). Retrieved 10 October 2008.
- Zimbabwe inflation hits new high BBC News, 9 October 2009
- Chizhanje, Hendricks (14 July 2007). "Harare suspends release of inflation data". Zimbabwe Online – via The Zimbabwe Situation.
- Sibanda, Tichaona (21 May 2008). "Inflation hits one million percent as prices continue to skyrocket". SW Radio Africa. Archived from the original on 26 May 2008 – via The Zimbabwe Situation.
- "Zimbabwe annual inflation over 100,000 per cent". The Sydney Morning Herald. 21 February 2008. Archived from the original on 12 May 2008 – via The Zimbabwe Situation.
- "Hits 355 000%". Zimbabwe Independent. 15 May 2008 – via The Zimbabwe Situation.
- "Zimbabwe inflation spirals again". BBC News. 14 February 2008.
- Kadzere, Martin (9 October 2008). "Inflation soars to 231 million percent". The Herald. Retrieved 7 January 2010 – via The Zimbabwe Situation.
- "Our mutual friend". The Economist. The Economist Newspaper Limited. Retrieved 18 June 2015.
- Hanke, Steve H.; Kwok, Alex (May 2009). "On the Measurement of Zimbabwe's Hyperinflation" (PDF). Cato Institute Journal. Cato Institute: 359. Retrieved 18 June 2015.
- Bauer, Joerg. The Flight of the Phoenix: Investing in Zimbabwe's Rise from the Ashes during the Global Debt Crisis. CreateSpace. p. 281. ISBN 978-1490908632. Retrieved 18 June 2015.
- Wines, Michael (7 February 2007). "As Inflation Soars, Zimbabwe Economy Plunges". The New York Times. Retrieved 4 May 2010.
- "Zimbabwe jail over bread prices". BBC News. 1 December 2006. Retrieved 4 May 2010.
- Zimbabwe economy virtually foreign exchange-based: media Yahoo News, 1 January 2009
- Zimbabwe: Econet Subscribers Caught Unawares allAfrica.com, 3 January 2009
- "Harare diary: 'Hope has died'". BBC News. 21 January 2009.
- "Zimbabwe abandons its currency". BBC News. 29 January 2009. Archived from the original on 9 November 2011.
- Hyperinflation forces Zimbabwe to print $200 million notes. (6 December 2008). CNN. Retrieved 6 December 2008.
- Van Gelder, Elles. "Zimbabwe; Black Market Thriving". Archived from the original on 29 March 2012. Retrieved 15 April 2011.
- "Zimbabwe; A worthless currency". The Economist. 17 July 2008. Retrieved 15 April 2011.
- McLaughlin, Elliot (25 June 2008). "Harare Woman; If you talk too much ... they hunt you down". CNN Online. Retrieved 25 November 2017.
- "Zimbabwe Rolls Out Z$100tr Note". BBC Online. 16 January 2009. Retrieved 13 April 2011.
- "Searching for fuel and other tales from Zimbabwe". 1 October 2003.
- Thornycroft, Peta (13 February 2007). "1,600pc inflation makes new notes useless". The Telegraph. Archived from the original on 15 May 2011. Retrieved 3 June 2018.
- "Zimbabwe's 'cosmetic' cash reforms rapped". 6 August 2006. Archived from the original on 27 August 2006.
- "Zimbabwe introduces new currency". BBC. 30 July 2008. Retrieved 30 July 2008.
- "Zimbabwe Abandons Its Currency". BBC Online. 29 January 2009. Retrieved 15 April 2011.
- Hanke, Steve (June 2008). "Zimbabwe; From Hyperinflation to Growth". The Cato Institute. 6: 1–36. Retrieved 7 April 2011.
- Grandes, Martin (December 2003). "Macroeconomic Convergence: In Southern Africa: The Rand Zone Experience" (PDF). OECD Development Center. Working Paper 231. Retrieved 15 April 2011.
- Chipo Musoko (5 December 2014). "RBZ issues 'centavo' coins, says bringing back Zimbabwe dollar suicidal". The Source. Retrieved 8 December 2014.
- "Zimbabwe to print own version of US dollar". BBC News. 5 May 2016. Retrieved 10 July 2016.
- "Zimbabwe inflation reaches record high since 2012". Bulawayo24 News.
- Musarurwa, Tawanda (17 August 2018). "Zimbabwe: Inflation Rises to 4,29%" – via AllAfrica.
- Pandit, Srimoyee (28 December 2015). "Zimbabwe decides to use the Chinese Yuan as its main currency". FX Street. Retrieved 10 February 2016.
- "Chinese Yuan as Zimbabwe's Currency: Govt Rebuts". Zimeye. 23 January 2016. Retrieved 25 February 2016.
- Hawkins, Tony (27 June 2016). "Dollar shortage highlights Zimbabwe's woes". New Zimbabwe. Retrieved 10 July 2016.
- Mordasov, Pavel (9 October 2019). "The Return of Hyperinflation in Zimbabwe". Mises Wire. Auburn, Alabama: Mises Institute. Archived from the original on 11 October 2019.
- Amin, Haslinda (22 January 2020). "At More Than 500%, Zimbabwe's Ncube Sees Inflation Stabilizing". Bloomberg News. Archived from the original on 26 February 2020.
- Vinga, Alois (26 January 2020). "Ncube scorned for Davos claims Zim economy recovering". New Zimbabwe. Archived from the original on 26 January 2020.
- "Zimbabwe struggles with hyperinflation". New York Post. Associated Press. 10 October 2019. Archived from the original on 16 December 2019.
- "Zimbabwe Inflation Rate". Trading Economics. March 2020. Missing or empty