Hyperinflation in Zimbabwe

Time occurred

2000-2009

Hyperinflation – an explanation

Hyperinflation is a rare phenomenon generally associated with quick growth in money supply (or printing money) to fund substantial fiscal deficits resulting from wars, revolutions, empires’ collapse, and new nations’ formation. As a result, the actual value of the country’s currency can sharply decline.

The term far exceeds regular inflation, representing an extremely fast-paced rise in prices. A country that is experiencing hyperinflation will witness the costs of goods and services skyrocketing uncontrollably over a specific timeframe. By definition, hyperinflation occurs when inflation rates soar above 50% per month.

The earliest examples of hyperinflation took place in the Netherlands in 1634. However, one of the most infamous instances of hyperinflation unfolded in the 1920s. After World War I, burdened by crippling reparation debt, Weimar Germany experienced a staggering monthly inflation rate of 29,500% in 1923, according to the CATO Institute.

Hyperinflation in Zimbabwe

In the late 2000s, Zimbabwe experienced one of the highest inflation rates in history. At its peak in November 2008, the monthly inflation was recorded at around 79.6 billion per cent.

This extreme inflation led to the abandonment of the Zimbabwean dollar in 2009, with the government allowing foreign currencies like the U.S. dollar and South African rand to be used instead, aiming to stabilize the economy over time.

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What caused the hyperinflation in Zimbabwe

Zimbabwe’s hyperinflation crisis was driven by the nation’s wide range of catastrophic policy decisions. It was mainly caused by:

Excessive government printing of money

in response to:

• Rising national debt

• Decreased economic output

• Falling export revenues

• Price controls that worsened shortages

• Dwindling confidence in the government, economy, and political stability

• Anticipation of hyperinflation

Without a strong economic base, this rapid increase in the money supply drastically reduced the value of the Zimbabwean dollar, creating runaway inflation.

Land Reform and Agricultural Collapse

In the late 1990s, the Zimbabwe government implemented a series of land reforms aimed at redistributing land from white farmers to black farmers. However, with limited agricultural experiences and resources, the new farmers faced significant challenges in maintaining production levels, leading to a sharp decline in food output. This collapse in agriculture, especially in key exports like tobacco, devastated the economy with a shortage of food and reduced therefore export revenues.

War debts and public spending

Since its involvement in the Second Congo War (1998-2003), Zimbabwe faced a high level of public spending and national debt, which prompted the government to print more money to meet its obligations. Nevertheless, this only fueled further inflation and led to a decline in the value of bonds held by investors, making it difficult to sell new debt in the future.

Impacts

Zimbabwe’s economic consequences due to hyperinflation were far more devastating and had a long-lasting effect on the economy and society.

Severe shortages of basic goods

During the worst period, people living in Zimbabwe were unable to afford basic necessities including food, fuel, and medicine due to soaring prices while wages and incomes lagged behind. Price controls imposed by the government worsened shortages, leading to the emergence of a black market.

Currency devaluation

The Zimbabwean dollar lost its value to the point where it became virtually worthless. With inflation nearly doubling throughout the day, anyone who received money had to either convert it into foreign currency immediately or spend it right away. More ridiculously, people had to carry large bundles of cash just to purchase basic goods, and many businesses began refusing to accept the local currency.

Abandonment of the Local Currency

With money becoming worthless, individuals and businesses increasingly switched to the use of foreign currency, in 2009, the Zimbabwean dollar was abandoned, and the government permitted the use of foreign currencies such as the U.S. dollar and South African rand for transactions. This represented a significant turning point in the economy. As of now, the Reserve Bank of Zimbabwe still allows the use of multiple currencies for transactions, including the U.S. dollar, the South African rand, and the Botswana pula.

References

Jens R.C, Sharmini, C, Baker, O.A, Sonia, M & Norbert, F 2007, Lessons From High Inflation Epidsodes for Stabilizing the Economy in Zimbabwe, International Monetary Fund, available at <https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Lessons-From-High-Inflation-Epidsodes-for-Stabilizing-the-Economy-in-Zimbabwe-20658>.

Helen, N 2022, What is hyperinflation and should we be worried?, World Economic Forum, available at <What is hyperinflation? | World Economic Forum>.

International Monetary Fund 2010, Zimbabwe: Challenges and Policy Options after Hyperinflation, Volume 2010, Issue 006, https://doi.org/10.5089/9781462309184.087.

Tejvan, P 2019, Hyper Inflation in Zimbabwe, Economics Help, available at <Hyper Inflation in Zimbabwe – Economics Help>.