Causes and Effects of Zimbabwe Hyperinflation

Hyperinflation

One recent case of hyperinflation was in Zimbabwe. This hit the country in 2009, and ended in 2015 when the country's currency was phased out in favor of the USD, at a valuation of $1 quadrillion to $ USD. According to reports, people with accounts up to 175 quadrillion will be paid out $5 USD. The Zimbabwe dollar was essentially abandoned in 2009 because of the hyperinflation, but people there were using USD and ZAR long before that. Those two were the official currencies of the country for many years, with new currencies such as the yuan, AUD, yen and Indian rupee (for some reason) joining the list of currencies that were accepted in the country in 2014 (RT, 2015).

Hyperinflation, of course, is the rapid increase in the money supply. This is usually a response to supply shocks, and often a rapid depreciation of the currency will have already been underway before the hyperinflation sets in. Hyperinflation reflects a situation where the market does not have any particular faith in the government that issues the currency to honor its value -- the hyperinflation is the risk premium that is attached to that currency. There is no set definition for hyperinflation, but a lot of zeroes are usually involved, because there are substantial increase in the money supply that are unrelated to broader economic factors (Investopedia, 2016).

The genesis of hyperinflation in Zimbabwe was the country's land reform program. After gaining independence, Zimbabwe was run in a relatively reasonable manner (for Africa), but as President Mugabe got older, his policies became increasingly erratic. His King Lear-esque descent took a turn for the worse with the land reform policies. The country had been a large scale agricultural exporter through the 1990s, one of the most successful countries in Africa. The reforms were a social experiment, aimed at replacing white landowners with black farmers. Many of the people taking over the farms had little to no experience with farming, and agricultural production plummeted. Moreover, this forced land seizures removed much confidence that international markets had in Mugabe's ability to lead. The country's biggest foreign exchange earner, tobacco, dropped from $600 million to $125 million in just a few years, gutting the country's foreign exchange intake (Mohan, 2016).

The agricultural policies were not the only contributing factor, however. Mugabe then ordered troops to get involved in the Second Congo War for some reason, wiping out the country's monetary reserves precisely at the point when the agricultural policies were eliminating incoming foreign exchange. Just in case that was not enough, the country fell into utter mismanagement. The budget deficit as a percentage of GDP went from 3% in 1998 to 10% in 2006. Government expenditures had doubled at a point in time when the balance of payments was gutted of its incoming foreign exchange. Mugabe's solution, was of course not going to be based on sound economic policy, because he was not sane. He instead decided to print large amounts of money to grow the money supply -- presumably to pay off some of the debt -- and money was printed at a rate that far exceeded the country's rate of inflation. Now the printing of money was driving the inflation rate higher. By 2008, hyperinflation had set in to an impressive degree, the inflation rate being 11.2 million percent.

The consequences were dire. People's savings were wiped out, for one. Where a loaf of bread once cost $7,000, it soon cost in the trillions. Nobody had money unless they were earning, but the disastrous economic policies had wiped out confidence in Zimbabwe. Not only did the international community lack confidence in the country, but anybody with any education inside Zimbabwe lacked confidence, too. The unemployment rate shot up to 80% as businesses closed, and the economic instability created a mass exodus out of the country, in particular there is a large community of ex-pat Zimbabweans in South Africa now.

Without foreign exchange, the country was unable to afford medications, and this left it unable to defend against malaria, HIV and other illnesses common to the region. So health outcomes deteriorated quickly. The USD and ZAR were adopted as currencies in order to provide a medium of exchange, but of course many people had no way to acquire these currencies. Hence the exodus to South Africa, were one could earn some hard currency. Many others were displaced within Zimbabwe or fled to neighboring countries, such as oil-rich Angola.