I am sure a lot of you would be surprised to see a post on such a topic by me since I mostly don’t go into the economic side of things. But I recently had a presentation to do on it in our Global and Indian Economy class and it really opened my eyes to many things I didn’t know and I am sure most of you wouldn’t know. To understand this post, you don’t need any technical knowledge or anything. So what actually happened in Zimbabwe to completely wreck the economy?
This is the history of the Zimbabwean Dollar –
In 1980 – 1 Rhodesian Dollar and 1 Zimbabwean Dollar (ZWD) were at par – 1 ZWD = 1.46 USD
In 2005 – 1 ZWD = 1/1,000,000th of British Pound
In 2006 – 1st Re denomination: 1 Revalued Dollar = 1000 Old Dollars (ISO renamed it as ZWN)
In 2007 – Third Dollar: 1 Revalued Dollar = 10bn Old Dollars (ZWR)
In 2009 – Fourth Dollar: 1 Revalued Dollar = 1 trillion Old Dollars (ZWL)
Re-denomination is the process whereby a country’s currency is re-calibrated due to significant inflation and currency devaluation. This shows that the Zimbabwean dollar was re-calibrated at least four times.
Hyperinflation is a type of inflation whereby the currency is continously losing its value and for three years continuously is above 50% and approaching 100%. There are certain things which can cause hyperinflation –
– Increasing amount of money supply due to excessive expenditure
– And thus since the money supply increases, the value of the currency starts falling down completely
– Inflation can also become hyperinflation when the taxes which need to be collected to fund the government expenses are not collected in time
One model of hyperinflation deals with increasing money supply which leads to very high confidence. The other model deals with loss of confidence as the expenses of the country become very high and thus leading to people selling the money rather than keeping it with them.
Hyperinflation in Zimbabwe was caused due to –
– Increased supply of money because of excessive govt expenditure in the war in Congo, giving money to the war veterans in 1997, the controversial land reform procedure wherein the lands were taken from the whites and were supposed to be given to the blacks. But instead the dictator Robert Mugabe gave it to his party men who weren’t interested in agriculture and thus the crops were completely destroyed.
– The production costs increased due to drying up of foreign currency as many countries imposed sanctions and also IMF suspended its membership. The labour costs started rising excessively because of the labour unions
– There was a shortage of basic goods due to very high demand
– The inflationary expectations lead to increased inflation wherein people think that if they buy more goods the prices will rise or if the inflation for the previous 5 years has had a pattern, it would be the same for the next 5.
– The controlled market and production prices wherein the prices for selling goods had to be fixed keeping other factors constant destroyed the industrial sector. Organizations stopped production or moved to producing other kinds of goods.
– The exchange rate was set at a rate much below the market determined rate and this caused huge problems
All these problems finally showed such results!
In 2009, after a conciliation between Mugabe and the opposition party, finally the Zimbabwean Dollar has been removed effectively removing hyperinflation. Only the US Dollar runs in Zimbabwe today and due to this they made their first GDP growth of 3.5% in 10 yrs.
But there is still a long way to go for them if they want to reduce their 95% unemployment rate.