The economy of Zimbabwe has been undergoing hyperinflation since February 2007, according to Cagan's definition of hyperinflation. 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 790.6 billion percent month-on-month, 89.7 sextillion (8.97×1022) percent year-on-year in mid-November 2008. At that time, a $100 trillion banknote could not pay for a simple bus fare.
In April 2009, Zimbabwe stopped printing its currency, and currencies from other countries were used. In mid-2015, Zimbabwe announced plans to completely switch to the United States dollar by the end of that year.
In June 2019, the Zimbabwean government announced the reintroduction of the Real Time Gross Settlement dollar (RTGS), 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 another period of hyperinflation. In March 2020, with inflation above 500% annually, a new task force was created to assess the currency problems. By July 2020, annual inflation was estimated to be 737%.
Historical context
On 18 April 1980, the Republic of Zimbabwe was born from the former Republic of Rhodesia. The Rhodesian dollar was replaced by the Zimbabwean dollar at par value. When Zimbabwe gained its independence from the United Kingdom, the newly introduced Zimbabwean dollar was initially more valuable than the United States dollar at the official exchange rate. However, that did not reflect reality because, 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 previously, and the tobacco industry was thriving. Economic indicators for the country were strong.
From 1991 to 1996, the Zimbabwean ZANU–PF 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 in the name of anti-colonialism intended to evict white landowners and place their holdings in the hands of black farmers. However, many of the new farmers had no experience or training in agriculture. Many farms simply fell into disrepair or were given to Mugabe loyalists. 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 fell 45%, and manufacturing output fell by 29% in 2005, 26% in 2006 and 28% in 2007. Unemployment rose to 80%. Life expectancy dropped. Much of the nation's middle class fled the country en masse taking much of the nation's capital. 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 $22 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 missteps 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 people and Mugabe's government have led to many clashes. There was also unrest between black people and white people, in which the land reform was a factor. One aspect of this reform sought to discriminate against white people specifically and many were forced by the regime to sign over their businesses to the black majority.
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 ATMs for one major bank gave a "data overflow error" and stopped customers' attempt to withdraw money with so many zeros.
Self-perpetuation
Also 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.
Inflation rate
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, with the year-over-year inflation rate reaching an astounding 89.7 sextillion percent. This resulted in US$1 becoming equivalent to Z$2,621,984,228.
On 13 July 2007, the Zimbabwean government said that it had temporarily stopped publishing 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 increasing the money supply.
Old Mutual Implied rate
As hyperinflation accelerated, the value of the Zimbabwean 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 Old Mutual shares traded in the London and Harare stock markets and used it to derive a national daily exchange rate between the Zimbabwe dollar and the pound. Shares had much looser capital controls than the Zimbabwean banking system, so they 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.
Adaptations
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 the prices of few goods 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 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, 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 the 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 in 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 at up to Z$10,000,000,000 for a loaf of bread. In May 2022, it was reported that the devaluation of the Zimbabwe dollar's black market exchange rate, which is used in most financial transactions in the economy, has been driving up inflation in the country.
Redenomination
At independence in 1980, the Zimbabwean 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 banknotes 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$200000000 note was announced just days after the printing of the Z$100000000 notes.
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 notes to buy foreign currencies. The Reserve Bank printed Z$21 trillion dollars to pay off debts owed to the International Monetary Fund.