THE RATE OF INFLATION IN ZIMBABWE
Dating back to as far as 1990, Zimbabwe has experienced high rates of inflation; this was mainly because of the seizure of privately owned land by the government. Zimbabwe experienced demand-pull inflation as the government printed excess cash to meet the demands of it involvements in the Second Congo War; as a result, the money in circulation was larger than the amount of good that were being produced in the economy.

The government introduced new land reforms in the late 1990’s. These reforms led to the redistribution of land. The land was distributed to less experienced farmers who lacked full knowledge on how to run a farm. This led to a rapid decrease in the levels of production. The country was no longer producing enough produce to export. This was also the similar situation in the manufacturing industry.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The situation in Zimbabwe was further aggravated by decline in agricultural production, as the country’s economy was mainly agro-based. This in turn resulted in the rapid depreciation of the Zimbabwean currency. The tobacco industry, which according to quora.com was the largest generator of foreign exchange earnings in Zimbabwe and contributed at least a third of the country’s foreign exchange earnings in 2000 completely collapsed. Tobacco, which pocketed $600 million in the year 2000, generated less than $125 million in 2007. This crippled the agricultural economy severely.

The decline in produce soon began to have its effect on the citizens as well. There was now a shortage of many goods, which led to increase in price levels. However, because purchasing power had deteriorated due the high circulation of cash people could purchase only a handful of goods. Prices of goods rose higher than wages thus crippling the economy as people demanded higher salaries to meet the price levels of goods.

The government then introduced price controls as a way of making the goods more affordable to the average working person. At times police forces stepped in when businesses would not abide to this law. This attempt was however futile as costs of production continued to increase this further led to shortages as suppliers were no longer will to supply at full capacity. This only aggravated the rate of inflation.

As the country was no longer exporting as much as it used this implied there was less foreign currency in the country. The country soon fell into debt as they were importing more than they were importing goods and services. The government responded to this situation by printing even more money to meet the demands of the economy. Matters were made worse as at the time Zimbabwe was assisting in the war. The government continued printing more money to meet the demands of war as well as paying salaries to officials. Inflation also meant that bondholders saw a fall in the value of their bonds, which made it even more challenging to sell future debts.

The table below illustrates the rate of inflation in Zimbabwe from 1994-2008.

This economic downfall soon began to show it effects. The modern day paradox of broke billionaires became evident in Zimbabwe. Billionaires who could not afford the basic day-to-day commodities as prices rose faster than wages. Thus, many Zimbabweans became poverty stricken with starvation striking the more rural parts of the country. The price of bread rose on a daily basis. The Economic Times Newspaper noted on 13 June 2008, that ‘a loaf of bread now costs what 12 new cars did a decade ago,’ and ‘ a small pack of locally produced coffee beans costs just short of one billion Zimbabwe dollars. A decade ago, that some would have bought 60 new cars.’
The value of property and assets soon began to depreciate. This was a good opportunity for anyone interested in property investment to invest, however the bank were not offering credit and buying foreign currency with the Zimbabwean dollar that was constantly depreciating made it more cumbersome. Many people who had savings lost them. Business confidence was also damaged due to lack of investment opportunities. The level of hyperinflation and fall in production disrupted normal economic activity resulting thus resulting in a fall of the country’s gross domestic product.

In some parts of the country people switched to barter economy as the Zimbabwean dollar proved worthless. Some services were traded in place of commodities. This barter economy was not beneficial to everyone as not everyone had goods to trade the services. Soon many businesses soon adopted the South African Rand and American dollar as a means of survival. For example, property owners accepted groceries as a method payment for rent.

Furthermore, banks came to stand still and closed down. This meant there was no longer any credit available as the prices continuously rose on a daily basis. The value of debt was soon wiped out. Investment became extinct as bank closed down as well as normal business as they no longer had access to credit for reinvestment.

People spent their salaries as soon as they received them or changed it to foreign currency as prices doubled on a daily basis their salaries would soon become invaluable. Bus fare more expensive in the evening when people were commuting back home than in the morning on their way to work. The key was to get rid of the Zimbabwean currency as soon as possible as it was losing its value in a matter of hours.

To attain a better perspective as to how, adverse the situation in Zimbabwe was we must look at how the economy flourished before independence and then experienced a sharp decline post-independence.

As purchasing, power further deteriorated the Zimbabwean government issued Z$100 trillion. This was the largest denomination ever issued as it set a record. However, the Zimbabwean dollar did not survive long in the economy as it was soon ditched in favor of other foreign currencies. The local tender lost more than 99% of its value. During the early years of independence, the Zimbabwean dollar was equivalent to US$1.54.

When Zimbabwe gained independence in 1980 annual inflation stood at 5.4%, monthly inflation averaged 0.5%. The largest denomination printed at the time (1980) was $20 as compared to the billion and trillion dollar notes that were printed during the period of hyperinflation. By the year, 2008 real GDP had dropped 17% with per capita GDP at US$136-41 percent below what it was at independence. According to a report made by the United Nations Office of Humanitarian Affairs unemployment stood at 94%. (Makochekanwa 2009)
In addition to Zimbabwe’s economic crisis, the country faced a lot of public debt. Zimbabwe being an agriculturally based economy it depended on high agricultural output. However, a drought struck the country resulting in low output. This further resulted in economic debt, as the nation was no longer producing enough to product to export. Output fell by 50% between the years of 2001-2009. The commercial production of maize fell by 76% and tobacco by 64%.

The governments lack of discipline when it came spending crippled the economy even more. In 1997, the government approved unbudgeted expenditures amounting to 3% of GDP, for bonuses to approximately 60000 war veterans. The government the tried compensating by increasing taxes to cover up, this was however futile as protests were held by trade unions. This then then led to the government printing more money sowing the early seeds of inflation.

Hyperinflation accompanied by Zimbabwe’s economic crisis set the country back more than half a century. The average Gross Domestic Product per capita was US $151 per year in 1954. However, in the year 2008 the average declined to US $136 eliminating the gains of the previous years.

The economic situation in Zimbabwe led to many social factors. The heads of many households were forced to immigrate to neighboring countries in search of better living conditions. This led to division of many families. As the economy further eroded so did the health sector. A cholera epidemic hit the country during August 2008-June 2009, over 95000 cases were reported, and over 4000 deaths were recorded.

One of the major factors leading to Zimbabwe’s economic downfall was the impecunious fiscal policies implemented by the government. As stated by the International Monetary Fund reports the budget deficit stood at 10.0 percent of the estimated GDP in 2006.

As the year 2007 began, Zimbabwe began to experience early stages of hyperinflation, as the shelves of most supermarkets were bare. This however, led to the birth of underground markets. Citizens travelled to the neighboring countries such as South Africa and Botswana to purchase the many household supplies that could no longer be found in stores they would then resell the good in Zimbabwe as means of survival. The inflation sky rocked to 50% per month in the same year. By the end of the 2008 Zimbabwe was now experincing full blown hyperinflation. As a result the government stopped printing bank notes and adopted the South African Rand as well as the American dollar.

Zimbabawe’s unstable economy reppelled foreign invetment. Inveters were not willingly to invest in a countiries future which seemed to be opaque. In 2008 the Indeginisation and Economic Empowerment Bill was passed. This law meant that Zimbabwean would take up 51% of ownership of the foreign owned companies. This was done in an attempt to promote economic growth and to further empower Zimbabweans. However this had the opposite effect as it resulted in foreign companies pulling their invesments out of the country.

Even after switching to the US dollar Zimbabwe still faced some challenges in boosting it economy. For starters there were was minimal foreign investment in the country due to the Indeginisation and Economic Empowerment Bill that had been passed.They also faced obstacles when it came to rebuilding public finances, instituting and maintaining credible policies to contol government spending as well as eliminating poverty. The governemnet also searched for incentives to promote economic growth in the country.

Slowly the economic sitiuation in zimbabwe started to improve. Real Gross Domestic Product started to improve by 9 percent of the 2009 levels marking the second year of growth. Inflation subsidised to single digits. Acoording to the Reserve Bank of Zimbabwe, the October 2009 conumer price inflation was 4.2 percent on a year-over-year basis, compared with 4.3 percent in September. Real Gross Domestic Product per capita in 2009 increased 4.8 percent from 2008 levels the second postive reading since 1998 of mostly negative growth rates.

After the Zimbabwean dollar was eliminated and the United States dollar was introduced, transactions in the multi-currency econmy were authourized and payment of taxes in foreign exhanges was approved.The United States dollarbecame the pricipal currency whilst other cuurencies such as the Botswana Pula and South African rand were granted official status. Budget revenue estimates and planned expenditures for 2009 were dominated in U.S. dollars, and the subsequent budget for 2010 was also set in U.S. dollars.

During the 1980s to the 1990s, the Zimbabwean government mainly used financial budgetary support from the International Monetary Fund, World Bank and other commercial lenders. The over dependence on external borrowings led to an accumulation of enormous debt obligations. As the output in both the agricultural and manufacturing was decreasing, the government had no source to pay off its debts. This resulted in the country becoming not credit worthy. The government then resorted to domestic borrowing, which resulted in further debt.

The first fiscal policy announcement in Zimbabwe 1980 saw the government making a commitment of fiscal soundness, targeting a reduction in the rate of growth of net current expenditure to levels below 7% in real terms of 1% below that of the Gross Domestic Product per annum. This was meant to reduce the budget deficit and allow sustainable fiscal policies in the 1980s.

The government adopted liberalization policies under the Economic Structural Adjustment Program in the early 1990s. This policy sought to achieve fiscal reduction deficit as a proportion of Gross Domestic Product was to reduce by 2% annually from 10% to a target of 5% by 1995. In addition, government targeted to reduce tax ratio from 35% of Gross Domestic Product to 33% by the end of the reform period, while at the same time introducing cost recovery measures to boost non-tax revenues. The government reduced civil service wage bill from 16.5% of Gross Domestic Product to 12.9% of Gross Domestic Product, removal subsidies and enhancement of revenue collection efficiency by 1995. The government also postponed capital expenditure as a measure of reducing budget deficit. Tax reforms targeted dispersion of tax rates, strengthening of tax administration and reduction of tax burden on import and export sectors.

Toward the end of 1997, a severe economic crisis hit the country; this was because of the suspension of payments support by the IMF. This suspension of balance of payments led to a 50% depreciation of the Zimbabwean dollar. This economic turmoil continued as far as 2008 when the multi-currency system was introduced. The Zimbabwean government relied on fiscal policy to achieve economic stabilization.

The Zimbabwean government introduced new reforms to improve the deteriorating economy. They reduced the number of days it takes to register property from thirty-six days to fourteen days and reducing time, it takes to pay taxes from two hundred an forty-two hours to one hundred and sixty hours. The goal was to make it easier for both local and foreign investors to start up their businesses. Many critics have blamed the inconsistent economic policies in Zimbabwe a result of the lack of investment. In particular, the Indigenization and Economic Empowerment law that had been passed that saw many foreign owned businesses pull out of the investment. The government then decided to make this law more amiable by giving foreign owned businesses up to 20 years to comply with the law and option to comply through empowerment credits. In 2015, Zimbabwe attracted six hundred million United States dollars in foreign direct investment this was a milestone considering the challenges facing the country.

The lack of both foreign and international investment resulted in the decline of levels of employment. Lack of investment meant no businesses were running which in turn resulted in leaving many Zimbabweans with qualified degrees unemployed. The newly imposed economic reforms did very little to boost the levels of employment. In Zimbabwe, the unemployment rate measures the number of people actively looking for a job as a percentage of the labor force.

Furthermore, the land reforms that were imposed between the years 2000-2001 were one of the largest factors that led to high unemployment levels. The land reforms resulted in low agricultural output, the farms were no longer producing enough to make a profit which resulted in many people who worked on farms being unemployed.

Zimbabwe has one the highest literacy rates in Africa; however, this high literacy rate did not help in developing the economy. The lack of investment resulted in many Zimbabweans fleeing the country to find better employment opportunities resulting in a brain drain. The human flight capital further weakened the economy as it resulted in the loss of tax revenue, a shortage of skilled workers, loss of future entrepreneurs and a loss in educational investment. The current economic climate in Zimbabwe is hostile thus, it is not sufficient to boost exports and agricultural production. It is important to note that Zimbabwe is largely an agricultural based economy.

In 2014, the Minister of Finance and Economic Development announced the demonetization of the Zimbabwean dollar. Demonetization is an act of removing the legal status of a currency unit. The aim of this process was to create stability in financial markets and enhance consumer and business confidence to boost investment. The government also hoped that this process of demonetization would lower the rate of unemployment, sustain the government budget and have foreign exchange reserves equivalent to one-year import cover.

The Reserve Bank of Zimbabwe sought to safe guard the integrity of the multi-currency system in place. During the demonetization window, people exchanged the old Zimbabwean dollars they had for the American dollar equivalent. Accounts that had balances of zero to $175 quadrillion Zimbabwean dollars were paid a flat out U.S. $5. Accounts which contained a balance higher than $175 quadrillion Zimbabwean dollars would be paid the United States dollar equivalent after applying the United Nations exchange rate of U.S. $1- Z$35 quadrillion. In the interim of demonetization, all cash payouts were exempted from Government taxes as well as bank-charges.
2008 Series
Denomination Year of issue Conversion rate Value per piece U.S. $
100 trillion 2008 250 trillion 0.40
50 trillion 2008 250 trillion 0.2
20 trillion 2008 250 trillion 0.08
10 trillion 2008 250 trillion 0.004
Source; Reserve bank of Zimbabwe Press statement 11 June 2015
2009 Series
Denomination Year of Issue Conversion rate Value per Piece U.S. $
500 2009 250 2.00
100 2009 250 0.40
50 2009 250 0.20
20 2009 250 0.08
10 2009 250 0.04
5 2009 250 0.02
Source; Reserve bank of Zimbabwe press statement 11 June 2015
The goal of demonetizing was also to introduce bond notes as the country was facing a liquidity crisis. The bond notes could not however, be used to settle international payments. The new bond notes value U.S. $ would be equivalent to $1 note. The bond notes would ease cash shortages as a measure of exchange. However, similar to the hyperinflation period of 2006-2008 this proved futile; as the exchange rate was not profitable to exporters, they began selling the U.S. dollar at a much higher rate black market in t to make profit.
The Governor of the Reserve Bank of Zimbabwe Dr. J.P. Mangudya reported that the central bank was importing $15 million U.S. dollars, more money that what it should, to offset the poor exports and massive externalization of the U.S. dollar. This resulted in banks setting daily withdrawal limits to meet the demands of the liquidity crisis. This resulted in long queues at the bank, as ATMs were no longer functioning. At present, it is nearly impossible to withdraw U.S. dollars from the bank or let alone find them they are circulating in the black market. When citizens now go to the bank, they now withdraw coins as the notes are in very low circulation.
The central bank reported that up to 2 billion U.S. dollars was siphoned out of the country in 2015. Apart from setting withdrawal limits as a means of deal with the cash crisis the government also converted corporate export receipts to other currencies and prioritized the importation of raw materials and intermediate goods. Civil servants in particular began receiving their salaries in the form of bond notes.