The History of Monetary Collapse in Zimbabwe

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?

Beginning in the 1990s, and even through the modern era, the Zimbabwe dollar is among the world’s most inflated currencies.

Monetary Policy, 1991 - 2008

The causes of Zimbabwe’s hyperinflation crisis were several instances of policy mismanagement by Zimbabwe’s president Robert Mugabe and his government.

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, as well as import enough food to reduce the risk of nationwide starvation. The gambit to ramp up food imports turned out to be another catalyst for hyperinflation as Zimbabwe found itself in greater debt—denominated in foreign currency. On top of this, no attempt was made by the Mugabe regime to curtail other forms of government spending.

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 and food imports, 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. The redenomination went so far that Z$100,000,000,000,000 (One Hundred Trillion) dollar notes were injected into circulation.

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.

Many ranked government officials participated in the currency exchange black market.

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 the 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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Conclusion

After peaking at nearly 557% inflation in late 2020, the Zimbabwean dollar has returned to a more modest, double-digit yearly inflation rate. However, as recently as June 2023, annual inflation again climbed to triple digits and reached 172%. These figures are according to data from the IMF.

As the saying goes: “History may not repeat itself, but it often rhymes.” The monetary crisis continuing to unfold in Zimbabwe has many similarities to the hyperinflationary events in the Weimar Republic (Germany) following World War 1.

• Weimar was saddled with an incredible amount of debt in the form of war reparations—denominated in the currencies of France, Russia, and Britain, respectively.
• The nation’s productive capacity (manufacturing) was severely diminished, reducing its ability to organically generate capital to pay its debts.
• The Weimar government increased deficit spending and printed freely in an attempt to keep pace with its debts.

Hyperinflationary conditions were exacerbated, and chaos ensued.

Time will tell how the nation will weather the seemingly endless storms of hyperinflation. But central bankers and central planners ought to heed history’s warnings: unrestrained money printing and irresponsible fiscal policy tend toward increased inflation. If left unchecked for long enough, the hyperinflationary spiral is nearly impossible to stop.