Hyperinflation and how it crashed Zimbabwe's economy

Memba Ben By Memba Ben, 20th Apr 2017 | Follow this author | RSS Feed | Short URL http://nut.bz/40xba-vh/
Posted in Wikinut>Writing>History

A brief explanation of how the Zimbabwean economy fell.

The story of how a once thriving economy went in freefall.

We like to think that our countries and leaders have taken the time to learn from previous mistakes made in history and such. Unfortunately, in Zimbabwe’s case, things didn’t go as planned. The last recorded case of hyperinflation was that of Germany in 1923 and so far, the fall of the Zimbabwean economy it is the only recorded case of hyperinflation in the 21st century.

Today, 35 quadrillion Zimbabwean dollars are equal to one U.S dollar.

How did the economy get to such a point?

After the Zimbabwean War for Independence, Robert Gabriel Mugabe came into power and Zimbabwe was actually thriving under him. President Mugabe had a lot of reform programs that he planned on implementing with the intent of giving power back to ordinary Zimbabweans and one of these was the land distribution policy.

Initially, the idea was to give the land to the poorest indigenous people to empower them. Unfortunately, the local people were not well equipped to run the farms, which were a huge part of Zimbabwe’s economy (Zimbabwe mainly exported cotton, tobacco, and wheat). Foreign investors saw property being confiscated and left the market. Combined with the droughts that ravaged Southern Africa in the 90s and 2000s, the quality of the exports declined and the production levels plummeted from 300,000 tonnes in 1990 of wheat to 50,000 tonnes in 2007.

Because of this, a country that was once a mass exporter of grain became an importer. This caused a serious impact of the economy. The banking sector collapsed, with farmers unable to obtain loans for capital development. The country was not able to repay a big chunk of its loans and its debt accumulated day by day and due to this reason, most of the external and internal borrowing came to a halt as no one was ready to lend them any more money and because of this, the national debt In Zimbabwe rose to over 100% of the GDP. The government resorted to printing large volumes of money to try to make up for the lost tax base and foreign investment but this only decreased the value of the existing money and caused prices to rise.

Usually, inflation was caused by economic booms and rapid growth in a country’s economy. However in Zimbabwe’s case, it was a collapse in the economy due to the supply of money growing while there was a shortage of basic goods and a fall in production.

President Mugabe blamed the inflation on “greedy businesses” demanding price rises, which forced him to set up price controls. These price controls only made things worse as businesses couldn’t make a profit selling at these fixed prices and producers cut output to avoid running more losses. But because the cost of production increased faster than the prices, suppliers have had no incentive to supply goods, which made the shortage worse. This equally led to the thriving of the black market where goods traded at far higher prices.

To survive, people began using foreign currencies such as the South African Rand and the U.S Dollar but the tricky part was getting hold of Rand or US Dollars when nobody would trade them for Zimbabwean dollars. So, to get around this obstacle, the people who were able to decided to store the money they had in foreign banks.

The more common method that most people took was for somebody in the family to leave the country and find work elsewhere, and then send their wages back to Zimbabwe in hard currency. Millions of Zimbabweans did this, amounting to about one out of every five or six citizens. Most went to South Africa, where living in a slum and working for less than what the locals will accept in wages (which is a pittance) is still seen as a more hopeful option than living in Zimbabwe.

Things were getting so bad that people were having briefcases filled with trillion Zimbabwean dollar notes but they were utterly useless. It got to the point where the government had no choice but to phase out the local currency in favour of the US dollar.

In the end, it was a combination of bad luck and ill-advised economic policies that brought the Zimbabwean economy to its knees and while Zimbabwe might no longer be experiencing hyperinflation, its effect on the economy will still be felt for many years to come.

Sources include:

https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
https://www.rt.com/business/267244-zimbabwe-currency-compensation-hyperinflation/
http://www.economicshelp.org/blog/390/inflation/hyper-inflation-in-zimbabwe/
http://www.wsj.com/video/zimbabwes-100-trillion-dollar-note-gains-in-value/E32B371E-2016-4BAC-9FDA-5CBE5DB7FE7C.html
http://edition.cnn.com/2016/05/06/africa/zimbabwe-trillion-dollar-note/

Tags

Zimbabwe, Zimbabwe Inflation, Zimbabwean Dollar

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author avatar Memba Ben
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