Imagine buying a loaf of bread for a billion dollars. Just doesn’t seem right, right? But if we pose the same question to the citizens of Zimbabwe, they’d probably say that it was a common daily expenditure. Zimbabwe suffered from hyperinflation, which led to the citizens being thrown under the bus by their own government. Let’s see the series of incidents and bizarre economic policies that led to that god-awful situation.
In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies, often the US Dollar. Prices typically remain stable in terms of other relatively stable currencies.
Hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, socio-political upheavals, a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue. A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.
Zimbabwe’s troubles started in the 1980s, when the ZANU-PF was led by the one and only Robert Mugabe. This party started with the anti-white policies where all land owned by white farmers was forcefully seized and given to the local people, who had no knowledge of farming, thus exponentially reducing the food supplied within the country. The banking sector also collapsed, with farmers unable to obtain loans for capital development. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006, and 28% in 2007, and unemployment rose to 80%. Life expectancy dropped. The Reserve Bank of Zimbabwe blamed the hyperinflation on economic sanctions imposed by the United States of America, the IMF, and the European Union.
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 perhaps $23 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.
One fine day in November 2008, the inflation rate was estimated at 79,600,000,000% per month. This resulted in US$1 becoming equivalent to the staggering sum of Z$2,621,984,228!
The government started printing 100 trillion dollar notes to keep up with the rising inflation rates, and there were many images that surfed the internet where each citizen went to their local market carrying huge carts filled with tons of cash, just to buy a few basic items for their daily needs.
The above image itself tells us the level of hyperinflation that the country experienced. The Zimbabwean government lost all faith in its own currency. There were talks of neighboring countries absorbing Zimbabwe.
In the subsequent years, all citizens adopted foreign currency for daily transactions, primarily US Dollar, as it was the most stable currency. In 2009, Zimbabwe aborted currency printing operations, and foreign currency was the main way to go for the trade.
In June 2015, the Reserve Bank of Zimbabwe said that it would demonetize its currency. The plan was to have completed the switch to the US dollar by the end of September 2015. In December 2015, Patrick Chinamasa, the Zimbabwe Minister of Finance, said they would make the Chinese yuan their main reserve currency and legal tender after China cancelled $40 million in debts. However, this was denied by the Reserve Bank of Zimbabwe in January 2016. In June 2016, nine currencies were legal tender in Zimbabwe but it was estimated 90% of transactions were in US dollars and 5% in Rand.
So, while hyperinflation was made possible by the printing of money, it is not the case that money printing always leads to high or hyper-inflations. Rather, it was the printing of money to finance expenditure, with no regard for the inflationary consequences, and the preceding collapse in the productive capacity of the economy, which pushed Zimbabwe into hyperinflation. Had Zimbabwe’s central bank been independent of politicians, and focused on price stability rather than facilitating government spending, hyperinflation would have been impossible.
– Article by M. Bharadwaj, 3rd year Department of Metallurgy and Material Sciences