Decoding Zimbabwean Hyperinflation

By Prakhar Singh

Introduction

On 16^th June 2015, the reserve bank of Zimbabwe relinquished its long-lasting efforts to save the country’s official currency. The Zimbabwean dollar was being decommissioned at the rate of 35 quadrillions per US dollar (that’s Z$35,000,000,000,000,000 for US$1). Further, any Zimbabwe dollar in circulation after 30^th September 2015 was deemed worthless. Though the Zimbabwe dollar was in circulation, the country had already adopted US dollar as its main currency in 2009. This happened in the backdrop of extreme economic instability when the highest monthly inflation reached 79,600,000,000% in November 2008, with prices doubling every 25 hours. This was just short of Hungary’s record, where the highest ever monthly inflation reached 41,900,000,000,000,000% in July 1946 (and the highest denomination bill was 100,000,000,000,000,000,000 or one hundred quintillion peng?). (Saks-McLeod, 2015)

The President of Zimbabwe; Robert Mugabe | Photo Courtesy: Newsweek

[su_pullquote]There have been serious human rights violations and policy failures since the government came into power in 1980’s after Zimbabwe got independence from the British rule.[/su_pullquote]

Economists blame the Mugabe government’s deranged policies for the instability and the current economic collapse. There have been serious human rights violations and policy failures since the government came into power in 1980’s after Zimbabwe got independence from the British rule. Since 1994, the life expectancy has dropped from 57 years to 34 years in case of women and from 54 years to 37 years for men. As per estimates, nearly 3500 people die every week due to HIV, poverty and malnutrition. The government has been involved in highly corrupt practices to remain in power by taking control of the judiciary, suppressing any kind of opposition, whatsoever. (WINES, 2007)

Policy Failures

[su_pullquote align=”right”]Under the agreement, the newly elected government was not allowed to capture and seize farm lands, majorly owned by the whites for the first ten years of independence. [/su_pullquote]

In 1980, after intense guerrilla fighting and backlash, elections were held in Zimbabwe under the supervision of the British regime. During the independence struggle in Zimbabwe, two major political parties were formed namely, Zimbabwe African People’s Union and the Zimbabwe African National Union. Zimbabwe African National Union led by Robert Mugabe, won the elections forming the first democratically elected government in the country. Lancaster house agreement was signed between the British government and the two political parties of Zimbabwe, ZAPU and ZANU on 21^st December 1979. The agreement covered independence constitution and ceasefire. Under the agreement, the newly elected government was not allowed to capture and seize farm lands, majorly owned by the whites for the first ten years of independence. Further, the government could buy lands from the whites only through a ‘willing seller’ and a ‘willing buyer’ program which constitutionally removed any possibility of exploitation or oppression against the whites.  Britain agreed to provide 44 Million pounds to the government for restructuring and carrying out land redistribution programs. (Schleicher, 2004)

As a result of the Lancaster agreement, Mugabe’s government could acquire 40 percent of the targeted 8 million hectares (19.77 million acres) of land. More than 50,000 families were resettled on more than 3 million hectares (7.41 million acres).

PHASE I LAND REFORM: Here onwards the willing buyer and seller clause was expired, and the government could go ahead with the compulsory acquisition of lands. Further in 1992, Land acquisition act was implemented, which empowered the government to buy lands at fair compensation criteria from the owners. On the other hand, the land owners were given the right to challenge the price set by the acquiring authority in the court.

In the meanwhile, 44 million pounds that were aided by the British government was already exhausted by 1988. Further, British government officially scrapped off the aid in 1996. This termination was done by the newly formed Tony Blair government, stating shortage of funds in  Margaret Thatcher’s administration.

PHASE II LAND REFORM: Phase II began 1998 onwards. Hereby, the government decided to take 50,000 square km of land from the 112,000 square km owned by the white owners and public corporations. Strategically, 50,000 was broken down into 10,000 square km; which was to be acquired between 1998 and 2003 equally.

[su_pullquote align=”right”]A referendum was held in the country, which aimed at empowering the government to take away the lands from the white owners without giving them any compensation.[/su_pullquote]

FAST TRACK LAND REFORM: Just with two years of tenure left with him, Robert Mugabe decided to implement fast track land settlement system from 2000. A referendum was held in the country, which aimed at empowering the government to take away the lands from the white owners without giving them any compensation. In spite of losing the referendum, the government started adopting violent measures against the land owners. To remain in power and for political appeasement the government encouraged the army veterans and other supporters to wage a war against the land owners. As a result, white owners were thrown out of their lands without any compensation. Millions of black people working in those farms went unemployed thereafter. (Coltart, 2008)

Major Reasons For Economic Collapse

The economic fallout was due to the combination of three major policy failures of the Mugabe regime. Firstly, in order to win support of the war veterans, the government decided pay them huge pensions with various other financial incentives. They were also encouraged to indulge in corrupt and illegal activities, allowing them to overthrow the white owners from their lands, illegally.

Secondly, in order to protect the mining investments made by Mugabe’s party leaders and elites in Democratic Republic of Congo, thousands of military troop deployment was done by the Zimbabwe government in Congo, to prop up the current regime and safeguard their self-interests. Thirdly, the land redistribution system turned out to be flawed, it hampered the economic productivity and growth of the overall agriculture sector. (Coltart, 2008) (Mugabe’s costly Congo venture, 2000)

Annual GDP in Zimbabwe | Photo Courtesy: Robertson Economic Information Services for Zimbabwean Statistics

In terms of the overall economic development, the growth rate as shown by the above diagram started diminishing in 1996 and further went negative in 1999. The gross domestic product declined by 43% in a mere span of 7 years.

Annual Wheat Production (1975-2007) | Photo Courtesy: Robertson Economic Information Services for Zimbabwean Statistics

Annual wheat production as shown here has fallen from 300,000 tons in 1990 to 50,000 in 2007. That’s an approximate fall of around 83% within 17 years.

Annual Earnings From Tobacco (2001-2007) | Photo Courtesy: Robertson Economic Information Services for Zimbabwean Statistics

Zimbabwe’s economy which was highly dependent on tobacco production, collapsed due to the fall in the tobacco industry. Tobacco accounted for a third of total foreign exchange earned by Zimbabwe. As shown in the diagram, in 2001 total revenue generated by tobacco was around 600 million US dollar, this came down to less than 125 million US dollar in the year 2007.

Manufacturing Performance (1996-2006) | Photo Courtesy: Robertson Economic Information Services for Zimbabwean Statistics

With the persisting higher level of interest rates, it became difficult for the manufacturers to borrow funds. Hence, the manufacturing sector shrunk by 47.5% from 1996 to 2006. Due to the government’s price control policy to curb inflation in 2007, wherein the producers were forced to cut the prices by half, caused a lot of manufacturers to exit the market, leading to fall in the overall manufacturing sector.

Formal Sector Employment (1991-2005) | Photo Courtesy: Robertson Economic Information Services for Zimbabwean Statistics

This figure shows the persistent decline in the employment level in Zimbabwe from 1991 to 2005. This happened due to various populist and corrupt policies which were being followed by Robert Mugabe’s government as discussed above.

Conclusion

Zimbabwe needs a strong political and public will in order to show some signs of development.

Further, the Zimbabwean economy needs structural overhaul, in terms of their populists, ineffective policies and redeployment of resources.

Most importantly, the country needs robust agricultural growth that should further be complimented with sound banking and finance system. Development in these two sectors can act as a catalyst for the growth of the overall economy in the coming years. Moreover, the political and constitutional reforms have become a necessity for Zimbabwe, looking at the past tainted records of the election procedures. (The Failing Economy of Zimbabwe, 2011)

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Prakhar Singh is currently pursuing B.Sc. Economics from Symbiosis School of Economics.

Bibliography:

1. Coltart, D. (2008). A decade of suffering in Zimbabwe. Washington DC: Centre for global liberty and prosperity.
2. Mugabe’s costly Congo venture. (2000, July 25). Retrieved from BBC News
3. Saks-McLeod, A. (2015, June 16). Total economic collapse: 35 quadrillion Zimbabwe dollars now worth 1 US dollar. Retrieved from Leaprate
4. Schleicher, A. (2004, April 14). Zimbabwe’s Land Program. Retrieved from Waybackmachine
5. The Failing Economy of Zimbabwe. (2011, January 15). Retrieved from Africaecon.org
6. WINES, M. (2007, February 7). As Inflation Soars, Zimbabwe Economy Plunges. Retrieved from New York Times

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