When Rhodesia gained sovereignty from Britain on April 18, 1980, the former colony became known as Zimbabwe and proceeded to replace the Rhodesian dollar with the ZWD. At its peak, the ZWD was once worth 1.59 United States dollars (USD) but experienced sharp declines after land reforms in the early 1990s contributed to the currency’s hyperinflation, causing it to become extremely devalued. These land reforms that arose under President Robert Mugabe’s policies caused inexperienced black farmers to gain land from more experienced white farmers, resulting in plunging of Zimbabwean agricultural productivity and the ZWD. In order to compensate the lack of food production and revenues, the Zimbabwean government continued to print money.
According to Former Zimbabwean Foreign Affairs Minister Jafari Banda, estranged from the Zimbabwean government after a failed assassination attempt on Mugabe, “What happened in Zimbabwe is that production stopped. An endless cycle of corruption brought a cease in production. We were not producing anything. The corruption led to a disruption in the industrial and agricultural infrastructure, which are the backbone of the economic sector. We weren’t producing, we weren’t mining, no industry, no commerce, no farming.”
With these land reforms continuing well into the 21st century, the country experienced spiraling hyperinflationary rates. By 2004, the rate of inflation was 624%. In a desperate attempt to fix the currency value, the Zimbabwean government revalued the currency from 1000 ZWDs to 1 ZWD. This was highly unsuccessful in stopping the monstrous inflation, however, as the ZWD continued in the established pattern of hyperinflation, reaching 1,730% in 2006. Dr. Gideon Gono, the governor of the Reserve Bank of Zimbabwe, announced the currency had to be printed in order to buy foreign currency to pay overdue payments to the International Monetary Fund. In addition, currency had to be printed to account for the rise in salaries for civil servants, including soldiers and policemen.
The Zimbabwean government could barely print enough currency to match the hyperinflation, so it requested citizens to add 0 digits at the end of existing currencies’ value. On the day of introduction of the 100 billion dollar bill (~1 USD) in July 2008, the amount was able to purchase a measly three eggs at the average local market. In its latest figure, Zimbabwe had reached inflation rates of almost 516 quintillion percent with a monthly rate of 79.6 billion percent or a daily rate of 98%. The greatest cause of this new surge in hyperinflation is the ongoing cholera outbreak that decimated the country starting August 2008, resulting in even greater food shortages. This correlated to a doubling of prices almost every 24.7 hours, akin to the hyperinflation of post Second World War Hungary. The ZWD reached such inflated rates that 100 trillion dollar bills eventually came into production in January 2009. These bills themselves could hardly purchase any goods in the market.
By this point, Zimbabwean traders completely abandoned the ZWD, adopting the more stable US dollar or South African rand (ZAR) instead. The Zimbabwean government legalized the use of these new bills in February 2009, while it tried to revalue the currency. The government was able to bring the value of its currency to more manageable face value, reducing the once $1,000,000,000,000 bill to $1 in February 2009. The new currency was almost completely irrelevant as most of the citizens in Zimbabwe refused to use it. The government officially ceased production of the ZWD in April 2009 and does not plan on reintroducing it again until 2010.
According to Economics Professor James Feyrer at Dartmouth College, “My understanding is that the dollar (and other “hard” currencies like the Euro) were acting as defacto currencies long before they finally abandoned the Zimbabwean dollar. If you were exporting to Zimbabwe you had no interest in taking the Zimbabwean dollar as payment. The dollarization formalizes this and should increase the volume of trade. For Zimbabwe they get to use a currency that has low inflation and high international credibility. The US actually benefits because there is seigniorage on the dollars being used in Zimbabwe. This is a very small amount since the Zimbabwe economy is so small relative the US economy.”
About the effect of dollarization on the economies of countries involved, Banda had to say, “It leads to distortions because the price of commodities is regulated by supply and demand, which varies from country to country. The effect is perhaps negligible depending on the size of the ‘parasite’ economy and commerce. The intent behind dollarization is to generate foreign currency in order to participate in foreign trade. But if it is the ZAR, the use of it Zimbabwe would greatly negate its strength and stability. In comparison, the Zimbabwe Reserve Bank at peak would hold 5 million USD to support the entire economy whereas 5 million USD isn’t even operational for a Bank of America branch.
For a while, Mugabe and his Zimbabwe African Nation Union – Patriotic Front (ZANU-PF) denied their policies as the major cause of Zimbabwean hyperinflation, blaming international sanctions by the US, EU and Australia on politicians and businessmen loyal to the Zimbabwean government. However, with opposition running high, Mugabe’s administration apologized numerous times and attempted to fix the crisis. Mugabe eventually succumbed to popular demands for him to share power with opposition party leader Morgan Tsvangirai of the Movement for Democratic Change – Tsvangirai (MDC- T) party. Tsvangirai was officially sworn in as Prime Minister on February 11, 2009.
Professor Feyrer also notes, “If Zimbabwe intends to reintroduce a domestic currency the only way to regain the public trust is to credibly promise to make the new currency stable. One way to do this is to peg the currency to a stable currency or have a currency board where there is 1:1 backing of the new currency with the dollar or other stable currency. Pegs can be broken, however, and it may take time to regain the trust of the public.”
About the dynamics of the economy, Banda had to say, “Zimbabwe needs to restart production. Get the industries running and farm the lands you seized. All will be futile unless there is a conducive political atmosphere in order to encourage foreign investors to invest and operate businesses that would restart commerce, industry, and farming.”
The currency issue brings up many important consequences for the future of Zimbabwe. Now that Zimbabweans removed the ZWD from use in their daily lives, how will it affect the stability of the Zimbabwean economy? How will international trade operate under this new system of dollarization? With the new combined party coalition ruling, will Zimbabwe be able to surmount the overwhelming economic pressures? Will the ZWD ever gain the trust of the people and come back into popular use? While economists are still gathering data on these economic implications, we can all hope that in the meantime Zimbabwe will be able to forge a new future.