Hyperinflation in Zimbabwe

Hyperinflation in Zimbabwe refers to a period of extreme currency instability and rapid inflation
that began in February 2007 and reached its peak from 2008 to 2009. During this time, it was
difficult to measure Zimbabwe's hyperinflation accurately because the government stopped
filing official inflation statistics. However, it is estimated that Zimbabwe's peak month of
inflation was in mid-November 2008, with an inflation rate of 79.6 billion percent month-on-
month and 89.7 sextillion percent year-on-year.

Causes of Hyperinflation in Zimbabwe

Hyperinflation in Zimbabwe was caused by a combination of factors, including government
policies, economic decline, and a lack of confidence in the government and economy. Here are
the main causes:
Government Printing Money: The Zimbabwean government responded to high national debt
and a decline in economic output by printing more money to finance its spending. This increase
in the money supply led to inflation.
Decline in Economic Output: The economy of Zimbabwe experienced a sharp fall in output,
both in agriculture and manufacturing. This decline in production caused a collapse in bank
lending and reduced the availability of goods, leading to shortages and pushing prices up.
Decline in Export Earnings: Zimbabwe's export earnings also declined, contributing to the
shortage of foreign currency and making it difficult to import goods. This further exacerbated
the shortage of goods and increased prices.
Price Controls: The government's implementation of price controls worsened the shortages of
goods. When there is a shortage, prices tend to rise. Combined with the printing of more money
and the shortage of actual goods, prices in Zimbabwe rose rapidly.
Lack of Confidence: The lack of confidence in the government, economy, and political life of
Zimbabwe played a significant role in hyperinflation. People holding the Zimbabwean currency
lacked confidence in its ability to retain its value, contributing to the rapid rise in prices.
Expectations of Hyperinflation: Expectations of hyperinflation can become self-fulfilling. As
people anticipate rising prices, they may spend their money quickly, leading to increased
demand and further price increases.
Land Reforms: In the late 1990s, the Zimbabwean government introduced land reforms,
redistributing land from white farmers to black farmers. However, the new farmers lacked
experience, leading to a large fall in food production. This decline in agricultural output
contributed to the economic decline and hyperinflation.
Impact of Price Controls on Hyperinflation
Ironically, the imposition of price controls in Zimbabwe worsened the shortage of supply and
exacerbated hyperinflation. Here's how price controls contributed to the crisis:
Shortage of Supply: Price controls set the price for basic goods in an attempt to keep prices
affordable and curb inflation. However, the cost of production increased faster than prices,
leading to a situation where suppliers had little incentive to supply goods through official
channels. This worsened the shortage of goods and further fueled inflation.
Inefficient Allocation of Goods: Price controls distort market signals and disrupt the efficient
allocation of goods and services. When prices are artificially set below market equilibrium, it
can lead to shortages, rationing, and inferior product quality. This inefficiency in resource
allocation further contributed to the economic crisis in Zimbabwe.
Inflation Expectations: Zimbabwe had a history of high inflation since the mid-1960s. As a
result, people became accustomed to expecting more inflation. This expectation of higher
inflation became self-fulfilling, as individuals demanded higher wages and pushed up prices in
anticipation of future inflation. This further fueled the hyperinflationary spiral.
The combination of price controls, shortage of goods, and inflation expectations created a
vicious cycle of rising prices and economic instability in Zimbabwe.

Impact of Hyperinflation in Zimbabwe

The hyperinflation in Zimbabwe had severe consequences for the economy and the population.
Here are some of the costs associated with hyperinflation:
Affordability of Basic Goods: As prices rose faster than wages and incomes, people in
Zimbabwe struggled to afford basic goods. The rapid inflation eroded the purchasing power of
the currency, leading to a situation where people became "poverty billionaires" - having large
amounts of money but unable to afford essential items.
Lack of Credit Availability: The entire financial system in Zimbabwe became undermined, with
banks closing and being unwilling to lend money. The value of debt was quickly eroded by rising
prices, making it difficult for businesses and individuals to access credit. This resulted in a
decline in normal business activity and reduced investment.
Menu Costs: With inflation almost doubling throughout the day, individuals and businesses had
to constantly adjust prices and get rid of Zimbabwean currency as soon as they received it. This
created additional costs and complexities in conducting daily transactions.
Switch to Barter Economy: As the value of money became worthless, people in Zimbabwe
resorted to a barter economy, exchanging goods and services directly instead of using currency.
This practice became more widespread, especially in 2009, when the use of foreign currency,
particularly the US dollar, became more prevalent.
Loss of Savings and Property Value: Individuals with savings in Zimbabwean currency lost their
savings unless they were able to exchange them for foreign currency. Even those with assets
and property often saw the value shrink. Foreign exchange controls made it challenging to take
money out of the country.
Damage to Business Confidence: The extent of hyperinflation and the decline in output
disrupted normal economic activity and led to a significant shrinkage in Zimbabwe's GDP. The
effects of hyperinflation and economic instability can have long-lasting impacts on investor
confidence and economic growth.
Solving Hyperinflation
To address hyperinflation in Zimbabwe, the government eventually stopped printing Zimbabwe
dollars and normalized the practice of using the US dollar as the primary currency. This decision
aimed to stabilize the economy and restore confidence in the monetary system.
Causes of Inflation: MV=PY
The Monetarist explanation of inflation suggests that prices are linked to the growth in the
money supply. According to the quantity theory of money (MV=PY), assuming a constant
velocity of circulation (V) and constant real output (Y), an increase in the money supply (M)
leads to an increase in prices (P). While the relationship between the money supply and
inflation is not as simplistic as this formula suggests, it provides a rough rule of thumb that if the
money supply increases by 1000% and real GDP remains the same, inflation of around 1000%
can be expected.
Mugabe's Explanation of Inflation
Former Zimbabwean President Robert Mugabe once blamed inflation on "greedy businesses"
demanding price rises. This led to the implementation of price controls, which, as mentioned,
proved ineffective in preventing inflation. Some Mugabe supporters also attempted to blame
inflation as a "Western import," although this assertion was unfounded given that inflation is
relatively low in Western economies.
Hyperinflation and Exchange Rate
Hyperinflation causes a rapid decline in the value of a currency. In the case of Zimbabwe,
inflation led to a steep decline in the value of the Zimbabwean currency.
Who Buys Goods During Hyperinflation?
During hyperinflation, even if a large percentage of the population is unemployed, there are still
people with money. Many groups of workers experience rising nominal wages due to the
government printing more money. However, because the output of goods is falling, the value of
money decreases rapidly. Therefore, even if only a small percentage of the population has
money, it is sufficient to cause inflation when there is a shortage of goods. The real problem is
that many people have more cash/money but declining real incomes. The combination of a
shortage of goods and the printing of more money inevitably leads to inflation.
Causes of Inflation
Hyperinflation occurs when the money supply increases rapidly without a corresponding
increase in economic output. This situation leads to a collapse in the economy, with the money
supply growing despite a fall in output and the number of available goods. It is important to
note that printing more money does not increase real output or real GDP. In fact, it is a basic
economic paradox that printing more money does not make a country richer. However, in
desperate situations, people may resort to such measures.