Zimbabwe has experienced a tumultuous financial journey, marked by periods of hyperinflation and currency instability. Its currency system has mirrored the ups and downs of its economy. From the introduction of the Zimbabwean Dollar (ZWD) to the adoption of foreign currencies and the recent introduction of the ZiG, Zimbabwe's economic landscape has been anything but stable.
Image of Zimbabwean currency during hyperinflation. Source: Wikipedia
The Rise and Fall of the Zimbabwean Dollar
After gaining independence in 1980, Zimbabwe was seen as one of Africa’s promising nations, with a strong economy based on agriculture, mining, and industry. The Zimbabwean Dollar (ZWD) was introduced in 1980 to replace the Rhodesian Dollar at par value. Initially, the newly introduced Zimbabwean dollar was initially more valuable than the United States dollar at the official exchange rate. However, that did not reflect reality because, in terms of purchasing power on the open and black markets, it was less valuable, due primarily to the higher inflation in Zimbabwe.
However, over the decades, economic mismanagement, corruption, and political decisions led to its downfall. From 1991 to 1996, the Zimbabwean ZANU-PF President Robert Mugabe embarked on an Economic Structural Adjustment Programme (ESAP) that had serious negative effects on Zimbabwe's economy. In the late 1990s, the government instituted land reforms in the name of anti-colonialism intended to evict white landowners and place their holdings in the hands of black farmers.
Many of the new farmers had no experience or training in agriculture. Many farms simply fell into disrepair or were given to Mugabe loyalists. From 1999 to 2009, the country experienced a sharp drop in food production and in all other sectors. Food output fell 45%, and manufacturing output fell by 29% in 2005, 26% in 2006 and 28% in 2007. Unemployment rose to 80%. Life expectancy dropped. Much of the nation's middle class fled the country en masse taking much of the nation's capital.
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According to economists, fundamental changes in economic policy such as controlling the budget deficit are needed. The government is paying for its profligacy by printing money. It became too expensive to print standard currency two years ago so the government began producing cheaper "bearer cheques", which are printed on only one side and have an unsettling resemblance to Monopoly money.
Hyperinflation: The Economic Catastrophe
Hyperinflation is a situation where prices increase rapidly as a currency loses its value. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe's hyperinflation because the government of Zimbabwe stopped filing official inflation statistics. In Zimbabwe, inflation rates reached a staggering 79.6 billion percent in November 2008.
The effects of hyperinflation were catastrophic. Savings were wiped out, and the economy ground to a halt as people lost confidence in the Zimbabwean Dollar. The urban rich and the cross-border traders are busy finding ways to avoid being caught out by the renumeration. Many fear it is the rural poor who will be left holding the bag of unusable Zim dollars at the August 21 deadline.
Until recently, wheelbarrows in Zimbabwe were used to ferry about huge amounts of cash to buy basic food stuffs. Then, as a cholera epidemic swept the country they were used to carry the frail and the dying to hospital. On the streets of Harare and across Zimbabwe, people of all races and all walks of life are lugging large satchels, backpacks and suitcases stuffed full of money.
Far from a sign that the country's battered economy is picking up, the mad spending is a frantic attempt to turn cash into assets. Poorer Zimbabweans are carrying their money to banks to exchange it for new bills. This is Zimbabwe's big currency change-over, a chaotic and confusing exercise that will see current bills replaced by new notes with three zeroes removed. For instance, a Z$20,000 note will be replaced by a new Z$20 bill. The value remains the same - about 17p.
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Police at roadblocks, border posts and airports are searching bags to see that no one is carrying more than Z$100m (about £88). Huge stashes of cash are being seized, particularly from rural peasants bringing their money to the cities to deposit in banks. More than 3,200 Zimbabweans have been arrested at roadblocks and Z$700bn has been confiscated, according to the state media. Hundreds of businesses are also under investigation.
Rampant inflation has rendered the once proud Zimbabwe dollar nearly worthless. Supermarket shoppers must push a trolley-full of currency to buy a trolley-full of basic groceries. Calculators, cash registers and cheque books fail to cope with the number of noughts needed as prices for daily goods run into millions, houses and cars cost billions and company budgets are in the trillions. Taking off three zeroes will make the Zimbabwean currency easier to handle, but only until inflation adds the zeroes back on.
At the official rate of exchange, Z$250,000 is worth one US dollar. But realistically the Zim dollar is worth even less because no dollars are available at the official rate. On the illegal but thriving parallel market it takes Z$600,000 to buy $1.
The currency switch-over highlights the severity of Zimbabwe's continuing economic collapse. In eight years, the country's GDP has declined by more than 40%, an unprecedented contraction by a country not at war, according to the World Bank. Other economic indicators are equally dire. Unemployment is estimated at 70-80%. Agricultural production has dropped by 60% and factories are operating at less than 20% of capacity, according to economists.
Ordinary Zimbabweans and economists alike blame Mr Mugabe's chaotic economic policies, which deny open access to foreign currency, support bloated state corporations with huge deficits and force banks and pension funds to invest in government bonds at negative rates.
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Zimbabwe's budget, according to a new supplement presented to parliament by the finance minister Herbert Murerwa on July 27, is running a deficit at 24% of GDP. The government is paying for its profligacy by printing money. It became too expensive to print standard currency two years ago so the government began producing cheaper "bearer cheques", which are printed on only one side and have an unsettling resemblance to Monopoly money.
There are growing fears that there will be riots over the currency change. Mugabe's fiercest opposition is the economy. He can rig elections, he can control the press, but he cannot rig the economy. The economy refuses to obey his orders.
In 2007, the government declared inflation illegal. Anyone who raised the prices for goods and services was subject to arrest. This amounted to a price freeze, which is usually ineffective in halting inflation. Officials arrested numerous corporate executives for changing their prices.
The most recent case-and one you might have seen on television-is Zimbabwe. Like Germany, new denominations of notes kept getting printed until they literally ran out of space to put zeros. As for wheelbarrows of cash in Zimbabwe, I think I’m going to have to say that yes, that definitely happened there.
Consequences of Hyperinflation
- Savings were wiped out
- The economy ground to a halt
- People lost confidence in the Zimbabwean Dollar
- Basic goods became unaffordable
- A significant portion of the population was impoverished
Dollarization and the Introduction of Bond Notes
In 2009, Zimbabwe officially dollarized its economy, meaning foreign currencies, primarily the US Dollar (USD) and South African Rand (ZAR), became legal tender. In December 2008, the Reserve Bank of Zimbabwe licensed around 1,000 shops to deal in foreign currency. This acknowledged what many were already doing. Citizens were allowed to use the US dollar, the euro, and the South African rand. However, teachers and civil servants were still being paid in Zimbabwean dollars. Even though their salaries were in the trillions per month, this amounted to around US$1, or half the daily bus fare.
Official, black market, and OMIR exchange rates 1 Jan 2001 to 2 Feb 2009. Prices in shops and restaurants were still quoted in Zimbabwean dollars, but were adjusted several times a day. Any Zimbabwean dollars acquired needed to be exchanged for foreign currency on the parallel market immediately, or the holder would suffer a significant loss of value.
In 2016, the Reserve Bank of Zimbabwe (RBZ) introduced bond notes. These were initially meant to be a stopgap to ease liquidity shortages. Although they were technically not a new currency, bond notes were used as if they were.
The Return of the Zimbabwean Dollar
In 2019, Zimbabwe decided to reintroduce the Zimbabwean Dollar, this time under the currency code ZWL. The RBZ has played a key role in trying to stabilize Zimbabwe’s currency through various policies. The Zimbabwean Dollar (ZWL) is the country’s official currency. However, due to lingering inflation and public distrust, the ZWL struggles to maintain its value.
On three occasions, the Reserve Bank of Zimbabwe redenominated its currency. First, in August 2006, the Reserve Bank recalled notes in exchange for new notes with three zeros slashed from the currency. In July 2008, the governor of the Reserve Bank of Zimbabwe, Gideon Gono, announced a new Zimbabwean dollar, this time with 10 zeros removed. A third redenomination, producing the "fourth Zimbabwe dollar", occurred in February 2009, and dropped 12 more zeros from the currency. It was thus worth 10 trillion trillion original dollars, as the three redenominations together reduced the value of an original dollar by 103 × 1010 × 1012 = 1025.
Computers could not handle the amount of zeros such that other forms of money had to be used to act as normal money (bearer's cheques). Banks had to input a lesser amount on the deposit or withdrawal slip then would put a covering statement, such as "multiply by 1000000 or add 10 zeros to your amount to get the real value".
The ZiG Currency and Gold Coins as a Stabilizing Force
In a bid to stabilize the currency, Zimbabwe introduced gold coins in 2022 as a store of value. Zimbabwe continues to grapple with high inflation. One of the biggest challenges is the lack of trust in the Zimbabwean Dollar. Economic instability, coupled with political uncertainty, further weakens the currency.
The ZiG, or Zimbabwe Gold, is a new digital currency backed by gold. The introduction of the ZiG currency and gold coins offers hope for stability. A solution effectively adopted by Zimbabwe was to adopt some foreign currency as official. To facilitate commerce, it is less important which currency is adopted than that the government standardise on a single currency. In 2009, the government abandoned printing Zimbabwean dollars entirely. This implicitly solved the chronic problem of lack of confidence in the Zimbabwean dollar, and compelled people to use the foreign currency of their choice.
In 2014, the Reserve Bank of Zimbabwe unveiled "convertible" coins in denominations of US$0.01 through US$0.50 (Zimbabwean bond coins). The bank said that 80% of Zimbabweans use the US dollar, and said the local lack of coins induces retailers to round prices up to the next higher dollar. The coins extend the use of the dollar as a de facto currency, and indeed the National Bank repeatedly assured that it does not intend to bring back a national currency.
In April 2023, the government announced the introduction of digital currencies backed by gold reserves.
The July 2018 inflation rate in Zimbabwe was officially 4.3% (up from 2.9% in June). In June 2019, the official inflation rate was 97.9%. In 2022, it was reported that the inflation rate quickened to 96.4% in April, from 60.6% in January. Zimbabwe's government ordered banks to stop lending with immediate effect. This move was designed to stop speculation against the Zimbabwean dollar and was part of a raft of measures to arrest its rapid devaluation on the black market.
The annual inflation rate had risen to 676% in March 2020, and there was a bleak economic outlook due to the effects of a drought in 2019 and the COVID-19 pandemic. In 2022, the country experienced another period of high inflation, which jumped to 131.7% in May from 96.4% in April.
Key Events in Zimbabwe's Currency History
| Year | Event |
|---|---|
| 1980 | Introduction of the Zimbabwean Dollar (ZWD) |
| 2009 | Official dollarization of the economy |
| 2016 | Introduction of bond notes |
| 2019 | Reintroduction of the Zimbabwean Dollar (ZWL) |
| 2022 | Introduction of gold coins |
| 2023 | Announcement of digital currencies backed by gold |
In the short term, Zimbabwe’s currency situation remains precarious. Zimbabwe’s currency history is one of turmoil, but it’s also a story of resilience. The government’s efforts to reintroduce the Zimbabwean Dollar and stabilize the economy with initiatives like the ZiG offer hope.
FAQ
What are bond notes, and how are they different from the Zimbabwean Dollar?
Bond notes were introduced as a temporary measure to address liquidity shortages.
What is the role of the ZiG currency in Zimbabwe’s economy?
ZiG, or Zimbabwe Gold, is a digital currency backed by gold.
How Did Zimbabwe's Hyperinflation Lead To Currency Collapse? - World Economy Watchers
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