This document, furnished by Wikipedia, goes into detail about what happened to Zimbabwe's economy in the first decade of the 21st century. Without a doubt, loose monetary policy and egregious government intervention sparked a massive hyperinflationary spiral that Zimbabwe is still attempting to recover from.

1. Hyperinflation in Zimbabwe
From Wikipedia, the free encyclopedia
Zimbabwe Dollars ranging from 10 to 100 billion printed within a one year period. The
magnitude of the currency scalars signifies the extent of the hyperinflation.
Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in
Zimbabwe's civil war and confiscation of private farms. During the height of inflation from 2008
to 2009, it was difficult to measure Zimbabwe's hyperinflation because the government of
Zimbabwe stopped filing official inflation statistics. [1] However, Zimbabwe's peak month of
inflation is estimated at 6.5 sextillion percent in mid-November 2008.[1]
In 2009, Zimbabwe abandoned its currency. As of 2014, Zimbabwe still has no national
currency; currencies from other countries are used. [2]
Contents
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1 Historical context
2 Causes
3 Inflation rate
4 Adaptations
o 4.1 Use of foreign currencies
o 4.2 The black market
o 4.3 Redenomination
5 Solutions
6 References
Historical context
On 18 April 1980, the Republic of Zimbabwe was born from the former British colony of
Southern Rhodesia. The Rhodesian Dollar was replaced by the Zimbabwe dollar at par value.
When Zimbabwe gained independence, the Zimbabwean dollar was more valuable than the US
dollar.[3] In its early years, Zimbabwe experienced strong growth and development. Wheat

2. production for non-drought years was proportionally higher than in the past. The tobacco
industry was thriving as well. Economic indicators for the country were strong.
From 1991–1996, the Zimbabwean Zanu-PF government of president Robert Mugabe embarked
on an Economic Structural Adjustment Programme (ESAP), designed by the IMF and the World
Bank, that had serious negative effects on Zimbabwe's economy. In the late 1990s, the
government instituted land reforms intended to redistribute land from white landowners to black
farmers to correct the 'injustices of colonialism'. However, many of these farmers had no
experience or training in farming.[citation needed] From 1999 to 2009, the country experienced a
sharp drop in food production and in all other sectors. The banking sector also collapsed, with
farmers unable to obtain loans for capital development. Food output capacity fell 45%,
manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to
80%.[4] Life expectancy dropped.[5]
The government blames most of Zimbabwe's economic woes on economic sanctions imposed by
the United States of America and the European Union.[6] These sanctions affect the government
of Zimbabwe,[7] and asset freezes and visa denials targeted at 200 specific Zimbabweans closely
tied to the Mugabe regime.[8] There are also restrictions placed on trade with Zimbabwe, by both
individual businesses and the US Treasury Department's Office of Foreign Asset Control. [9]
Causes
The largest denomination of a Zimbabwean banknote (100 trillion)
A monetarist view[10] is that a general increase in the prices of things is less a commentary on the
worth of those things than on the worth of the money. This has objective and subjective
components:


Objectively, that the money has no firm basis to give it a value.
Subjectively, that the people holding the money lack confidence in its ability to retain its
value.
Crucial to both components is discipline over the creation of additional money. However, the
Mugabe government was printing money to finance involvement in the Democratic Republic of
the Congo and, in 2000, in the Second Congo War, including higher salaries for army and
government officials. Zimbabwe was under-reporting its war spending to the International
Monetary Fund by perhaps $22 million a month.[11]

3. Another motive for excessive money creation has been self-dealing. Transparency International
ranks Zimbabwe's government 134th of 176 in terms of institutionalised corruption. [12] The
resulting lack of confidence in government undermines confidence in the future and faith in the
currency.
Economic mis-steps by government can create shortages and occupy people with workarounds
rather than productivity. Though this harms the economy, it does not necessarily undermine the
value of the currency, but may harm confidence in the future. Widespread poverty and violence,
including government violence to stifle political opposition, also undermines confidence in the
future.[13] Land reform lowered agricultural output, especially in tobacco, which accounted for
one-third of Zimbabwe's foreign-exchange earnings. Manufacturing and mining also declined.
An objective reason was, again, that farms were put in the hands of inexperienced people; and
subjectively, that the move undermined the security of property.
Government instability and civic unrest were evident in other areas. [14] Zimbabwean troops,
trained by North Korean soldiers, conducted a massacre in the 1980s in the southern provinces of
Matabeleland and Midlands, though Mugabe's government cites guerrilla attacks on civilian and
state targets. Conflicts between the Ndebele ethnic minority and Mugabe's majority Shona
people have led to many clashes,[15] and there is also unrest between blacks and whites, in which
the land reform was a factor. An aspect of this reform that seeks to bar whites from business
ownership induced many to leave the country. [16]
Self-perpetuation
Lack of confidence in government to practice fiscal restraint feeds on itself. In Zimbabwe,
neither the issuance of banknotes of higher denominations nor proclamation of new currency
regimes led holders of the currency to expect that the new money would be more stable than the
old. Remedies announced by the government never included a believable basis for monetary
stability.[17][18] Thus, one reason the currency continued to lose value, causing hyperinflation, is
that so many people expected it to.[19]
Inflation rate
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

Date
1980
1981
1982
1983
1984
1985
v
t
e
Rate
7%
14%
15%
19%
10%
10%
Zimbabwean inflation rates since independence (official up to Jul. 2008, estimates thereafter)
Date Rate Date Rate Date Rate
Date
Rate
Date
Ra
1986 15% 1992 40% 1998 48%
2004
132.75%
2008 Sep.
3,840,000,000
1987 10% 1993 20% 1999 56.9%
2005
585.84%
2008 Mid-Nov. 89,700,000,000,0
1988 7.3% 1994 25% 2000 55.22%
2006
1,281.11%
1989 14% 1995 28% 2001 112.1%
2007
66,212.3%
1990 17% 1996 16% 2002 198.93% 2008 Jul. 231,150,888.87%
1991 48% 1997 20% 2003 598.75% 2008 Aug. 471,000,000,000%

4. Over the course of the five-year span of hyperinflation, the inflation rate fluctuated greatly. At
one point, the US Ambassador to Zimbabwe predicted that it would reach 1.5 million percent. In
June 2008 the annual rate of price growth was 11.2 million percent. The worst of the inflation
occurred in 2008, leading to the abandonment of the currency. The peak month of hyperinflation
occurred in mid-November 2008 with a rate estimated at 79,600,000,000% per month.[20] The
price of US$1 cost $Z2,621,984,228[21] in October 2008.[22][23][24]
Adaptations
Use of foreign currencies
In 2007, the government declared inflation illegal. Anyone who raised the prices for goods and
services was subject to arrest. This amounted to a price freeze, which is usually ineffective in
halting inflation.[25] Officials arrested numerous corporate executives for changing their
prices.[26]
In December 2008, the Central Bank of Zimbabwe licensed around 1,000 shops to deal in
foreign currency.[27][28] Citizens had increasingly been using foreign currency in daily exchanges,
as local shops stated fewer prices in Zimbabwe dollars because they needed foreign currency to
import foreign goods. Many businesses and street vendors continued to do so without getting the
license.[29]
In January 2009, acting Finance Minister Patrick Chinamasa lifted the restriction to use only
Zimbabwean dollars. This too acknowledged what many were already doing. Citizens were
allowed to use the US dollar, the euro, and the South African rand. However, teachers and civil
servants were still being paid in Zimbabwean dollars. Even though their salaries were in the
trillions per month, this amounted to around US$1, or half the daily bus fare. [30] The government
also used a restriction on bank withdrawals to try to limit the amount of money that was in
circulation. It limited cash withdrawals to $Z500,000, which was around US$0.25. [31]
The black market
Official, black market, and OMIR exchange rates 1 Jan 2001 to 2 Feb 2009. Note the logarithmic
scale.

5. Living with hyperinflation was a challenge for Zimbabweans. Prices in shops and restaurants
were still quoted in Zimbabwean dollars, but were adjusted several times a day. Any
Zimbabwean dollars acquired needed to be exchanged for foreign currency on the parallel
market immediately,[32] or the holder would suffer a significant loss of value. For example, a
mini-bus driver charged riders in Zimbabwean dollars, but different rates throughout the day:
The evening commute was highest-priced. He sometimes exchanged money three times a day,
not in banks but in back office rooms and parking lots.
Such business venues constituted a black market, an arena explicitly outside the law. Transactors
could evade the price freezes and the mandate to use Zimbabwean dollars. But black-market
transactions are not enforceable under law; moreover, transactors are free to flout any other
Zimbabwean law.
The black market served the demand for daily goods such as soap and bread, as grocery stores
operating within the law no longer sold items whose prices were strictly controlled, or charged
customers more if they were paying in Zimbabwean dollars. [33] At one point, a loaf of bread was
Z$550 million in the regular market, when bread was even available; apart from a trip to another
country, the black market was the only option for almost all goods, and bread might cost Z$10
billion.[34]
Redenomination
At independence in 1980, the Zimbabwe dollar became the common currency. Originally, the
paper notes were Z$20, 10, 5, and 2, and the coins were Z$1, and 50, 20, 10, 5, and 1 cents. As
larger bills were needed to pay for menial amounts, the Central Bank of Zimbabwe planned to
print and circulate denominations of up to Z$10, 20, 50, and 100 trillion. [35] Announcements of
new denominations were increasingly frequent; the Z$200,000,000 bill was announced just days
after the printing of the Z$100,000,000 bill.
The government did not attempt to fight inflation with fiscal and monetary policy. In 2006,
before hyperinflation reached its peak, the bank announced it would print larger bills to buy
foreign currencies. The Reserve Bank printed a Z$21 trillion bill to pay off debts owed to the
International Monetary Fund.[citation needed]
On three occasions, the Central Bank of Zimbabwe redenominated the currency. First, in August
2006, the Central Bank recalled notes in exchange for new notes with three zeros slashed from
the currency.[36] In July 2008, the governor of the Reserve Bank of Zimbabwe, Gideon Gono,
announced a new Zimbabwean dollar, this time with 10 zeros removed. The Z$10 billion would
be redenominated to be Z$1.[37] This move was not just to slow inflation but also to make
computations more manageable.[38]
A third redenomination, producing the "fourth Zimbabwe dollar," occurred in February 2009,
and dropped 12 more zeros from the currency. It was thus worth 10 trillion trillion original
dollars, as the three redenominations together reduced the value of an original dollar by 10 3 *
1010 * 1012 = 1025.

6. Solutions
Hyperinflation has been halted within months when government takes the necessary steps. [citation
needed]
In the meantime, people patronise the black market and informal market for currencies in
which they have more confidence.[citation needed]
The most direct solution is a credible promise to stop printing unlimited amounts of money. [citation
needed]
However, Zimbabwean inflation lasted for five years[3] and the credibility of any promise
was problematic.
Alternatively, the government could declare some foreign currency to be the nation's official
currency. To facilitate commerce, it is less important which currency is adopted than that the
government standardise on a single currency. The US dollar, the euro, and the South African
rand are candidates; the US dollar has the most credibility and is the most widely traded within
Zimbabwe;[39] or Zimbabwe could join the nearby nations of Lesotho, Namibia, South Africa,
and Swaziland, which constitute the Common Monetary Area, or "Rand Zone"[3] by formally
deciding to use the rand to promote trade and stability. [40]
Short of abandoning the Zimbabwean dollar, Zimbabwe could enact a strict monetary policy. For
example, the government would allow the exchange rate to float for a period of perhaps 30 days,
so that the market would decide its true value, then declare a fixed exchange rate with the rand
and declare the rand a currency simultaneous with the Zimbabwean dollar. The supply of
Zimbabwean dollars would be limited, perhaps by a currency board such as in Hong Kong,
which has no other constraint than to maintain the fixed exchange rate.
In 2009, the government abandoned printing Zimbabwean dollars at all. [39] This implicitly solved
the chronic problem of lack of confidence in the Zimbabwean dollar, and compelled people to
use the foreign currency of their choice. As of 2013, Zimbabwe still uses a combination of
foreign currencies, mostly US dollars, and the economy is still in a slump.
Source: http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
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