Explainer: Causes of hyperinflation in Zimbabwe

Explainer: Causes of Hyperinflation in Zimbabwe

Zimbabwe underwent a currency crisis due to hyperinflation that initially began as a series of high-rate inflations in the late 1990s and resulting in the actual hyperinflation in 2008 to 2009. Prices spiraled out of control with an inflation rate of 48 percent in 1998 and registered the up to 79.6 billion percent in November 2008. The government introduced a 100-trillion-dollar Zimbabwean dollar note in 2008, but it was not enough to buy a loaf of bread. Zimbabwe stopped using its own currency in 2009 and adapted the use of foreign currencies, including euro and the U.S. dollar.

Currency Crisis: The Causes of Hyperinflation in Zimbabwe

1. Economic Crisis: Fundamental Causes of Inflation and Hyperinflation in Zimbabwe Due to Problems in the Economy

The inflation and subsequent hyperinflation in Zimbabwe were offshoots of more specific problems transpiring in its economy. Zimbabwean economists Arnold M. Chidhakwa and Gibson Chigumira noted that the country had a vibrant and diversified manufacturing industry in the early 1980s and it was likely to become one of the newly industrialized economies together with South Africa in the late 1980s. However, underinvestment and counterproductive interventionist policies negated economic growth that resulted further into an economic crisis.

Chidhakwa and Chigumira also mentioned that the fiscal position of Zimbabwe began to decline beginning the early 1990s due to budget deficits caused by numerous factors such as increases in civil service wages and salaries, high expenditures in social services, relief programs during periods of droughts, and parastatal losses. Industries and sectors, as well as subsidized credits, became inefficient due to their dependence on the ownership and control of the state.

Real GDP declined to 1.4 percent in 1997 from a GDP of 9.7 percent in 1996 and further plummeted to negative 4.8 percent in 2001 due to rising costs of production, weakening domestic demands because of decline in the income of the consumers, foreign exchange shortages, and budget deficits.

A report from the Federal Reserve Bank of Dallas authored by Janet Koech also noted that the participation of Zimbabwe in the Second Congo War from 1998 to 2002 resulted in unexpected expenditures amounting to hundreds of millions of dollars. The country also began defaulting on its debts from the International Monetary Fund, the World Bank, and the African Development Bank in 1999

With the worsening economic condition, Zimbabwe experienced a wave of emigration to neighboring countries, thus resulting in the decline of the labor force beginning in 2003. About 6 percent of the entire population emigrated in 2005 and this increased by 9.9 percent emigrated in 2010.

2. Agricultural Collapse: Specific Causes of Inflation in Zimbabwe Due to a Decline in Agricultural Productivity and Supply

After the country elected Robert Mugabe as its first prime minister in February 1980 and with its independence from the United Kingdom in April 1980, the government introduced land reform initiatives centered on equally distributing lands between white Zimbabweans of European ancestry and black subsistence farmers. However, the efforts were damning. A 2010 report from the United Nations identified critical problems within the land reform initiatives of the government. These included forceful confiscations of lands from white owners without proper compensation, poor handling of territorial disputes, and enduring shortages of resources required to carry out resettlement properly.

Productivity within the agricultural sector eventually declined due to two major factors. First is that according to several analyses, including an article published in the Florida Journal of International Law, agricultural output dropped because the new owners of farmlands, specifically the primary black landowners and their families who have strong ties with the government, had no experience in running farms. The same article noted that before 2000, white landowners owned extensive farmlands and used economies of scale to raise capital or borrow money to purchase farming equipment, fertilizers, and other inputs to increase their productivity.

The second factor, as mentioned in the report of the Federal Reserve Bank of Dallas, centered on natural causes. Weather disturbances and periods of drought adversely affected agricultural output. Hence, combined with the inexperience of new farmers and landowners, productivity fell by 50 percent from 2000 to 2009. Because Zimbabwe was one of the largest producer and exporter of tobacco in the world, export revenues and foreign reserves declined. The country also experienced starvation and famine due to food shortages.

Nevertheless, the shortage in food supplies in consideration of local demands resulted in inflation or in other words, price increases that eventually affected other commodities due to the impact of agriculture and food supply in the entire economic activity. Of course, it is also important to factor in other pressing problems in the economy to include inefficient markets due to state interventionism and budget deficits because of excessive expenditures by the government.

The Mugabe government tried to impose price controls to secure the buying powers of the consumers. However, these measures worsened the capability of the agricultural enterprises in other industries and sectors to effectively and efficiently produce commodities. Low economic productivity resulted in a shortage of supplies amidst existing levels of demands, thus leading to uncontrollable price increases.

3. Overprinting of Money: From Inflation to Hyperinflation in Zimbabwe Due to the Excessive Growth of Money Supply

The government of Mugabe responded to the economic crisis and ongoing inflation by increasing the supply of money in circulation particularly by printing more money or bank notes. Analysts believe that this is the primary cause of hyperinflation in Zimbabwe.

In their analysis, Chidhakwa and Chigumira mentioned that money supply grew at an average of 17.5 percent between 1980 and 1985. The supply further grew by 46.7 percent in 1993 and 102.7 percent in 2001. Both economists explained that this growth was due to excessive domestic growth expansion. However, they also noted that in a country with declining economic activity, growth in money supply is inflationary.

There are also other explanations for the growth of money supply. A report published by the BBC explicated that in its attempt to reap long-term financial rewards from its relationship with the Democratic Republic of Congo, the Mugabe government participated in the Second Congo War. The country financed its wartime involvement by printing more money to provide the army and government officials with higher monetary incentives.

Another reason behind the overprinting of money was the self-serving purpose of Mugabe. Economists Mark. J. Ellyne and Michael R. Daily mentioned that aside from rapidly growing central bank reserves to lend to the government and state-owned enterprises, the Mugabe administration deliberately increased the money supply through overprinting to win the favors of different political allies and other sociopolitical factions. Keeping these groups under the payroll of the government meant securing the political position of Mugabe.

Conclusion: The Factors of Hyperinflation Based on the Experience of Zimbabwe

In summary, there were two primary factor or causes of inflation and subsequent hyperinflation in Zimbabwe. The first revolved around depressed economic condition due to a decline in agricultural productivity and other inherent problems due to economic mismanagement that led to a reduction in overall economic productivity. On the other hand, the second centered on a monetary policy involving the overprinting of money or excessive growth of money supply by the Mugabe administration.

More specific causes include state interventionism that resulted in lack of competition and market failure, damning land reform initiatives, participation in the Congo War, failure in managing public finances, a decline of exports and dependence on imports, price controls that exacerbate shortages, negative effects of the economic crisis in the factors of production, and political challenges due to oppositions to the Mugabe administration.

Two theories of inflation can further explain the causes of hyperinflation in Zimbabwe. In the first primary cause mentioned above, the concept of demand-pull inflation explains that prices will naturally increase as demands for commodities increase natural faster than supply. Remember that there was a decline in economic productivity in Zimbabwe due to problems in the agricultural sector and other economic problems affecting other industries and sectors.

Moreover, in the secondary cause, a monetarist theory explains that inflation or price increase occurs when there is excessive growth of money supply. Note that too much supply leads to value depreciation. To be specific, an overabundance of money supply means that there is more money chasing the same number of goods and services.

FURTHER READINGS AND REFERENCES

  • BBC. 2000, July 25. “Mugabe’s Costly Congo Venture.” BBC. Retrieved online
  • Chidhakwa, A. M. and Chigumira, G. 2016. “Pre-Crisis Macroeconomic Performance and Triggers of the Economic Crisis in Zimbabwe.” In eds. G. Kararach and R. O. Otieno, Economic Management in a Hyperinflationary Environment: The Political Economy of Zimbabwe, 1980-2008. Oxford: Oxford University Press. ISBN: 978-0-19-874750-5
  • Dancaescu, N. 2003. “Note: Land Reform in Zimbabwe.” Florida Journal of International Law. 15:615-644
  • Ellyne, M. J. and Daly, M. R. 2016. “Zimbabwe Monetary Policy: From Hyperinflation to Dollarization.” In eds. G. Kararach and R. O. Otieno, Economic Management in a Hyperinflationary Environment: The Political Economy of Zimbabwe, 1980-2008. Oxford: Oxford University Press. ISBN: 978-0-19-874750-5
  • Koech. J. 2011. “Hyperinflation in Zimbabwe.” Globalization and Monetary Policy Institute: 2011 Annual Report, Federal Reserve Bank of Dallas. Federal Reserve Bank of Dallas. PDF
  • United Nations Country Team, Zimbabwe Government. 2010. Country Analysis Report for Zimbabwe. Harare: United Nations Country Team