Since the dawn of the 21st century, the hyperinflationary measures of the Zimbabwean dollar (ZWD) have plagued the economic progress of the nation.

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.



Zimbabwe 100 Trillion

The International Monetary Fund estimated that by January, Zimbabwe’s inflation rate had escalated to 150,000%. The Zimbabwean government has refused to release inflation figures in an effort to keep prices down since last June. That plan has failed as businesses have used inflation estimates to set prices.

The Zimbabwe Reserve Bank decided to increase the money supply to ease the cash crisis. Yet this will only worsen the problem. The Reserve Bank is considering issuing a new currency of a lower denomination. However, if Zimbabwe is unable to implement monetary reform along with the new currency, inflation will continue to spiral out of control.

Zimbabwe’s raging hyperinflation is a result
of a lack of revenue to cover expenditures.
The Zimbabwean government has been
unable to reduce spending, subsequently
racking up a very large fiscal deficit. A
government can finance its spending in three ways: by taxing the public, selling government bonds, or printing money.

Due to existing economic woes in Zimbabwe, it is not feasible for the government to raise more revenue by increasing taxes. Zimbabwe already has one of the highest tax rates in the world, as the average citizen is subjected to a 35% income tax. However, despite these high taxes, the Zimbabwean government provides very few social benefits for its people. Many people in Zimbabwe barely have enough money to afford basic necessities like transportation, food and rent, let alone fund their government’s fiscal expansionary policies.

Zimbabwe is unable to raise revenue through the sale of government bonds because there is no public demand for them, stemming from a lack of faith in the Zimbabwean government.

Contrarily, every year the U.S. government raises billions of dollars of revenue by selling bonds and securities to the public. The U.S. has established a reputation as a creditworthy institution, and has never defaulted on its debt obligations. Zimbabwe on the other hand, has been plagued with political unrest and financial insecurity. Investors are unwilling to risk their money in a precarious political environment in order to finance a government with questionable credit history. The Zimbabwean government is handicapped by their inability to raise revenue by issuing debt.

Unable to levy taxes or sell bonds, the Reserve Bank has resorted to printing money as a solution to their fiscal woes. The inflation rate has drastically increased from 3,700% in April of 2007 to 66,000% in December of 2007 to 150,000% in January of 2008. Zimbabwe used to be one of Africa’s most prosperous nations, however, poor monetary policy has destroyed the economy and unleashed hyperinflation.

The central bank’s loosening of monetary policy not only finances the fiscal and trade deficits, but also targets Zimbabwe’s past decade of negative GDP growth. In 2000, Zimbabwe’s president, Robert Mugabe, enacted land reform that severely hurt the country’s maize productions. The production of this staple crop, dropped by as much as 75% as a result of the reforms. This had a strong negative impact on rural incomes, exports, and food securities. Unemployment reached 80%, manufacturing fell 51% from 1997 to 2005, and exports declined by a half from 2001 to 2005. As a result, aggregate demand and the economy’s total output decreased significantly. The Reserve Bank’s policy theoretically could shift aggregate demand back to long run output. However, increasing money supply has only resulted in hyperinflation and an exacerbation of the Zimbabwe’s economic recession.

Historically, countries that have suffered from hyperinflation have resolved the problem by restoring faith in their currency and by enacting strict monetary reform. Zimbabwe must end its economic misrule by beginning to deal with its hyperinflation.