The Zimbabwean hyperinflation occurred between 2007-2009. It was the first episode of hyperinflation recorded in the 21st century. During the hyperinflation in Zimbabwe, prices rose exponentially and reached an inflation rate of 89,700,000,000,000,000,000,000% in November 2008.
At the peak of the hyperinflation, the Reserve Bank of Zimbabwe issued the banknote with the largest denomination in history.[1] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 2. It contained a face value of 100,000,000,000,000, or 100 trillion, Zimbabwean dollars. The hyperinflation in Zimbabwe ended in 2009 when the central bank stopped printing money and adopted the US dollar and other foreign currencies as legal tender.
Zimbabwe, which is located in Southeast Africa, gained independence from the British empire in 1965. After decades of internal conflict during the occupation of Britain, a white-minority government led by Ian Smith issued a Unilateral Declaration of Independence.
Britain hoped for a multiracial democracy. But the new government didn’t grant voting rights to black people in Zimbabwe.
As a result, a majority of the population was denied access to vote and the government increasingly oppressed political parties representing black people. The political conflict turned into a brutal civil war that lasted for 15 years.
In 1980, after the civil war ended and peace talks concluded, the first universal elections took place in Zimbabwe. The new president, Robert Mugabe, responded with forgiveness for his white predecessors.
But the newly elected government under Mugabe soon started mismanaging the country’s finances, paving the path for the hyperinflation in Zimbabwe decades later.
Prior to the hyperinflation, Zimbabwe earned a reputation for being the “bread basket” of Africa.[2] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 2.
Zimbabwe contains fertile soil, which is watered by summer showers and rivers. The ground is also rich in minerals, including diamonds, gold, platinum, nickel, iron, silver and coal.
For a while, Zimbabwe was the darling of the international community. The newly found peace and democracy, along with the natural wealth and economic opportunity of the country, attracted international investors.
The IMF and the World Bank provided loans to Zimbabwe, but only under the condition that it made various structural and economic reforms.[3] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 44.
Due to its strong farming and mining industry, Zimbabwe had an excellent credit record and the international community welcomed the country with open arms after the civil war ended.
Despite these economic opportunities, president Mugabe steadily increased government spending and accumulated unsustainable levels of government debt.
Mugabe rose to power after 15 years of civil war. Once the civil war ended, rehabilitation of war veterans became a primary political issue.
In order to provide war veterans with income, the government established the War Veteran Compensation Fund. But due to corruption inside the government, the new social security fund ran out of funds in 1996.[4] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 43. This led to the veterans lobbying for additional payouts.
In response to the war veteran movement, Mugabe approved a new pension plan for war veterans that equaled around double the average monthly salary of a civil servant in Zimbabwe.[5] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 43.
At the time, the World Bank was in the process of approving a new loan to Zimbabwe worth 100 million US dollars. When the plans for the veterans pension surfaced, the World Bank withdrew its loan and asked for further details on how the pensions would be funded.[6] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 44f.
In response, Mugabe’s government stopped debt repayments to the World Bank and defaulted on its past loans. The Zimbabwean government also suspended the structural and economic reforms it started.
The unsustainable social security program became one of the primary sources of excess government spending.
Additionally to the government’s unsustainable compensation fund for war veterans, Mugabe sent 11,000 troops to the Democratic Republic of Congo in 1998. The troops were sent to support the leader Laurent Kabila, who was in a civil war with rebel groups.
Zimbabwe’s participation in the Second Congo War led to an even larger government deficit, putting additional pressure on Mugabe’s government.[7] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 3f.
At this point, Zimbabwe didn’t receive any further loans from the IMF or World Bank. Zimbabwe’s default on its international debt sparked concerns among the international community. As a result, Zimbabwe received little to no outside funding, investment or aid anymore.
Shortly before Zimbabwe got involved in the civil war in Congo, the breakdown of trust and the withdrawal of foreign funding and investing led to currency crash on Friday, 14th of November 1997.
The Zimbabwean dollar lost 75% of its value against the US dollar in one day.[8] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 45. Subsequently, the stock market crashed and lost 46%.[9] Zimbabwe Independent: “A minute of silence for ‘Black Friday” Accessed April 26, 2022.
Additional to the increased government spending, several agricultural problems also contributed to the hyperinflation in Zimbabwe.
First of all, despite Zimbabwe’s reputation as bread basket of Africa, it experienced two serious droughts in 1992 and 1995.
In the late 1990s, Mugabe’s government began land reforms with the goal of evicting white landowners and transferring their property to black people. In the early 2000s, the land reform accelerated and turned increasingly violent.[10] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 53f.
War veterans started invading white-owned farms and confiscating the properties. The plan was to to claim 2,455 farms and resettle 150,000 families.[11] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 53f.
But many of these farms ended up in the hands of politically connected officials. And even if they didn’t, their new owners had little farming experience. This led to the collapse of Zimbabwe’s agricultural and mining export industries.
Food production and manufacturing output dropped sharply in the years leading up to the hyperinflation in Zimbabwe.[12] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 54.
As a result of these agricultural problems, the banking system collapsed. Farmers who had their farms confiscated weren’t able to repay their loans. In response, banks stopped accepting land title deeds as collateral. This made it hard for Zimbabweans, including non-agricultural businesses, to access financing.[13] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 54.
As economic output dropped, tax revenues of the government dropped as well. Combined with already unsustainable levels of national debt and stripped off international funding, Zimbabwe quickly approached bankruptcy.
As Zimbabwe’s national debt crisis spiraled out of control, Mugabe attempted to raise taxes. But the decision to raise taxes led to food riots. The government responded brutally to the riots but removed the additional taxes to avoid further confrontation and civil unrest.[14] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 46.
With the government’s ability to raise taxes limited and no access to foreign aid, loans and investments, the Reserve Bank of Zimbabwe began monetizing the government’s debt.[15] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 5 It printed money to keep up with rising governments expenses.
Cut off from international aid and funding, and the agricultural, industrial and banking sector collapsing, trust in the Zimbabwe dollar eroded.
After Black Friday in 1997, the Reserve Bank of Zimbabwe engaged in unprecedented levels of money printing. The government debt grew from around Z$10 billion to Z$10 quadrillion between 1998 and 2008.[16] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 48.
In 1997, Zimbabwe’s year-over-year inflation rate was 20%.[17] Hanke, A. Steve & Kwok, K. F. Alex: On the Measurement of Zimbabwe’s Hyperinflation, In: Cato Journal, Vol. 29, No. 2 (2009), pp. 355. In 2006, it had climbed to 1,281%, meeting the criteria for hyperinflation.
Here is how the inflation rates break down:
During the peak of the hyperinflation in Zimbabwe, the year-over-year inflation rate reached 89.7 sextillion percent.[18] Hanke, A. Steve & Kwok, K. F. Alex : On the Measurement of Zimbabwe’s Hyperinflation, In: Cato Journal, Vol. 29, No. 2 (2009), pp. 355.
As a result of the Zimbabwean hyperinflation, the government resorted to price controls. Mugabe’s government pressured merchants, sometimes with police force, to keep prices low.[19] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 6.
This resulted in food shortages because businesses couldn’t remain profitable at government-mandated prices. Producers of goods and services cut their output to reduce losses.
As a result, Zimbabweans waited in long lines at gas stations and stores. Supermarket shelves were empty. Similar to the German hyperinflation, the hyperinflation in Zimbabwe was accompanied by starvation and poverty.
Zimbabweans lost most of their life savings and anyone on a fixed income, such as pensioners, saw their pensions become worthless in real terms.
In June 2008, a loaf of bread cost what 12 new cars cost a decade ago. And small pack of coffee beans cost 1 billion Zimbabwe dollars. A decade ago, this amount of money would have bought 60 new cars.[20] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 6.
At the peak of the hyperinflation, prices doubled every few days.[21] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 6 Before the government issued price controls, businesses revised their prices several times a day.
As the Zimbabwe dollar became worthless, people resorted to foreign currencies and the use of barter to acquire basic necessities and preserve their purchasing power in one way or another.
The hyperinflation in Zimbabwe resulted in mass hunger. Apart from food shortages, basic necessities like soap and toilet paper were hard to get. Zimbabweans that had access to foreign currency went over the border and purchased products abroad.
Additionally to these effects of the hyperinflation in Zimbabwe, most basic government services gradually disappeared.[22] Haslam, Philip & Lamberti, Russell: When Money Destroys Nations (2015), pp. 139ff.
The water and sewerage system broke down. Water treatment facilities across Zimbabwe fell into despair as water engineers resigned, water treatment chemicals become unaffordable and dams and piping networks eroded. In many places, sewerage flowed openly in the streets and ran into rivers.
The Zimbabwe Electricity Supply Authority (ZESA) faced similar problems, which resulted in electricity shortages. Copper cables and transformers were stolen on a regular basis and traded for goods and cash.
Turbines at power stations lacked maintenance and eventually broke down, resulting in Zimbabwe having to import most of the country’s electricity from South Africa.
Electricity blackouts were common, and since most people didn’t have the money to purchase a generator, they resorted to candles, gas lamps and rechargeable LED lights. Fridges, stoves and other electricity-intensive equipment had to be turned off.
Many Zimbabweans burned wood in fireplaces and cooked over an open flame. This led to countless free-standing trees being cut down in public spaces and being used for cooking and heating during winter months.
Street and traffic lights stopped working, roads were littered with trash, the prison system collapsed and schools and hospitals grind to a halt.
The only two government services that Mugabe sustained were the police and military. As a result of the dire conditions in Zimbabwe, many people fled to neighboring countries like South Africa.
By 2010, over 1.25 million Zimbabweans had left the country. This amounts to a total of 9.9% of the population.[23] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 5.
In 2009, the government stopped printing money and adopted foreign currency as legal tender, with the US dollar at the forefront.
By adopting the US dollar as legal tender, and effectively dollarizing, the hyperinflation came to an end. As of 2016, nine currencies were legal tender in Zimbabwe with 90% of transactions conducted in US dollars and 5% in South African Rand.[24] New Zimbabwe: “Dollar shortage highlights Zimbabwe’s woes” Accessed April 26, 2022.
The country continued facing many challenges after dollarization, including maintaining credible policies to control government spending, reducing poverty and promoting economic growth.
In 2010, real GDP expanded 9% and inflation dropped to single digits after adopting a foreign currency regime.[25] Federal Reserve Bank of Dallas: Hyperinflation in Zimbabwe, In: Globalization and Monetary Policy Institute (2011), pp. 9. According to the Reserve Bank of Zimbabwe, year-over-year inflation was at 4.2% in October 2012.
In 2019, Zimbabwe transitioned again to being a single-currency country by adopting the Real Time Gross Settlement dollar, also known as Zimdollar or zollar. This resulted in a resurgence of hyperinflation in Zimbabwe in 2020.
In March 2020, facing the impending Covid-19 pandemic and its economic consequences, inflation soared to 676%, meeting the criteria for hyperinflation for a brief period.
But the resurgence of hyperinflation can’t solely be attributed to the pandemic, since it is estimated that the inflation rate briefly surpassed 500% in 2019.
It’s more likely that the attempted de-dollarization and reintroduction of a unified Zimbabwean currency, issued by the Reserve Bank of Zimbabwe, can be attributed to the rising year-over-year inflation rates in 2019.
The Zimbabwean government reintroduced foreign currencies as legal tender, including the US dollar, as inflation appeared to spiral out of control again.
As of January 2022, the year-over-year inflation rate dropped back to 60.6%, ending the brief resurgence of hyperinflation in Zimbabwe. Since then, a multi-currency system allowing foreign currency prevails.
The recent episode of hyperinflation was nowhere as extreme as the one experienced between 2007-2009. However, it remains an important reminder that Zimbabwe can quickly plunge into hyperinflation.
Confidence in the local currency and the government’s and central bank’s ability to conduct sustainable fiscal and monetary policy remains low.