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The History of Monetary Collapse in Zimbabwe
Table of Contents
Key Highlights
- Hyperinflation is defined as a monthly inflation rate greater than 50%.
- Zimbabwe experienced a decade-long period of hyperinflation due to poor monetary policy strategies.
- Hyperinflation increases the price level of goods, reduces incentives the save, and decreases confidence in government.
Hyperinflation, which is generally characterized by an inflation rate of greater than 50% per month, rapidly erodes the value of a currency, leading to economic stagnation, price volatility, and distrust of government monetary policy and authority.
It can take a country years to recover from the economic impacts of hyperinflation, and if monetary policy is not corrected appropriately, it can easily reoccur. Zimbabwe, a country located near the south-eastern coast of Africa, experienced almost a decade-long inflation crisis. From 1998 to 2009, the inflation rate of the Zimbabwean dollar rose rapidly, peaking at 79,600,000,000% per month in mid-November of 2008. Hyperinflation of the Zimbabwean dollar during this time was caused by economic mismanagement, including direct efforts by the government to conceal the true value of the currency. So how did this hyperinflation crisis happen? Why did it go on for so many years?
Monetary Policy, 1991 - 2008
The direct cause of Zimbabwe’s hyperinflation crisis was monetary policy mismanagement by Zimbabwe’s president Robert Mugabe and his government. Beginning in the early 1990’s, the president instituted a series of economic reforms that proved disastrous. Poorly structured land reforms caused a sharp decline in food production, which raised food prices even as the banking sector collapsed due to economic sanctions imposed by the U.S. European Union, and the IMF.
The banking sector’s inability to mobilize funds for investments and loans was partly due to political looting by societal elites and government officials. Banks were also unwilling to loan money because of the increased risk due to political and monetary uncertainty. As a result, capital development and economic output sharply declined, and employment peaked at 80% during the inflation crisis.
In addition, the Zimbabwe government printed vast sums of new currency in order to finance military action in the Democratic Republic of the Congo. This directly violates the quantity theory of money, which states that the price of goods and services is positively correlated to the amount of money in circulation. The explosion in the volume of currency in circulation due to money printing caused a rapid increase in prices.
The severity of the hyperinflation in Zimbabwe was also due to institutional corruption and a lack of confidence in the government and currency. While printing currency to finance military efforts, the Zimbabwe government underreported its money printing activities by over 20 million dollars a month.
In an effort to correct the falling value of Zimbabwe’s currency, the Reserve Bank of Zimbabwe simply increased its money printing efforts, declared inflation illegal, redenominated its currency from Z$5, Z$10, and Z$20 bills into Z$100,000,000 and Z$200,000,000 bills, intentionally avoided updating its foreign exchange rates or inflation rates, and announced new currency regimes that did not address the underlying causes of inflation and further reduced citizens’ confidence in the stability of currency.
As a result, the black market for foreign currencies became a common method for obtaining basic goods and services at a relatively consistent value, despite the illegal use of foreign currency.
Economic Reform, 2008 - Present
As inflation hit all-time highs in late 2008, the Zimbabwean government began to institute several reforms. First, they adopted foreign currencies, including the U.S. Dollar and the Euro, as official currencies, which allowed them to stabilize prices, exchange rates, and rebuild confidence in the value of currency.
Secondly, in 2009, the government stopped printing Zimbabwean dollars and allowed people to use the foreign currency of their choice, mostly U.S. dollars. This restored consumer confidence in currency values.
As a result, the inflation rate fell consistently for many years, hitting 4.3% in July 2018. Although the Zimbabwe Minister of Finance stated in 2015 that they would not attempt to reinstate a national currency, a new regime in 2019 announced a new Zimbabwe currency that has prompted a return of hyperinflation. Indeed, the inflation rate was 417.25% inflation in October 2020.
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Will Deflation Hurt the Economy?
Deflation is a general decrease in the price of goods and services. This change will influence the economy in several ways, but is primarily negative.
