FOREIGN TRADE UNIVERSITY IN HCM CITY

ESSAY
Subject: MACROECONOMICS 2
CLASS: ML55
TOPIC: HYPERINFLATION OF ZIMBABWE
GROUP: 5
2011156060 Nguyễn Minh Duy (Leader)
2011156063 Bùi Hoàng Gia Hân
2011155161 Nguyễn Thục Hiền
2011155083 Lã Nguyễn Quang Công
2011156064 Đoàn Thị Ngọc Hân
2011155088 Trần Nguyễn Linh Đan
2011155094 Nguyễn Vĩnh Đạt
2011156145 Nguyễn Phạm Hoài Anh
2011155122 Phạm Công Duy
 TABLE OF CONTENTS
INTRODUCTION .......................................................................................................... 4
1. Research context: .................................................................................................... 4
2. Research purposes: .................................................................................................. 5
3. Research target and scope: ...................................................................................... 5
4. Research method: .................................................................................................... 5
5. Research structure: .................................................................................................. 5
CHAPTER 1: THEORETICAL BASIS ......................................................................... 6
1. Definition of inflation ............................................................................................. 6
2. Types of inflation .................................................................................................... 6
2.1 Creeping Inflation .............................................................................................. 6

2.2 Walking Inflation ............................................................................................... 6

2.3 Galloping Inflation............................................................................................. 7

2.4 Hyperinflation .................................................................................................... 7

3. Inflation and hyperinflation: Causes ....................................................................... 7

3.1 Monetarist view of inflation: ............................................................................. 7

3.2 Keynesian view of inflation ............................................................................... 8

CHAPTER 2: THE HYPERINFLATION CRISIS IN ZIMBABWE ............................ 8

1. Context of Zimbabwe:............................................................................................. 8
2. Causes...................................................................................................................... 9
2.1 Land reform programme .................................................................................... 9

2.2 War funds......................................................................................................... 10

2.3 Government instability .................................................................................... 10

2.4 Hope decreasing............................................................................................... 10

2.5 Inappropriate price control .............................................................................. 11

3. Developments: ....................................................................................................... 11
3.1 Before hyperinflation: ...................................................................................... 11

3.2 During Hyperinflation: .................................................................................... 12

3.3 Hyperinflation to present day .......................................................................... 14

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 4. Consequences ........................................................................................................ 15
4.1 Decreasing the value of savings and retirement money .................................. 16

4.2 Increasing unemployment rate ......................................................................... 16

4.3 Food crisis ........................................................................................................ 16

4.4 Decreasing average life expectancy decrease .................................................. 17

4.5 Population shift ................................................................................................ 17

4.6 Menu cost......................................................................................................... 17

4.7 Poor billionaires ............................................................................................... 17

5. Measures the government can and should carry out in order to help the country
abstain from the current state of hyperinflation ........................................................ 17
5.1 Dollarization of the economy .......................................................................... 17

5.2 Modification of economic policy and a new policy construction ................... 18

5.3 The money supply control ............................................................................... 18

5.4 Foreign investors attraction by eliminating corruption ................................... 19

5.5 Reduction of military spending and conflict avoidance .................................. 19

5.6 Relations-strengthen with other countries ....................................................... 19

CHAPTER 3: ZIMBABWE’S RESPONSE TO ITS HYPERINFLATION ............... 20

1. Dollarization .......................................................................................................... 20

2. The effect of Dollarization .................................................................................... 21

CONCLUSION ............................................................................................................ 23

REFERENCES ............................................................................................................. 24

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 INTRODUCTION
1. Research context:
-Unlike a stable inflation rate, hyperinflation is defined to be an economic situation
where prices of goods and services skyrocket in a short period of time, thereby the
amount of G&S sold is declining while its value is climbing at an accelerating pace.
-Hyperinflation is totally capable of destroying a whole nation’s economy. Along with
the macro negative influences, it also impacts many political, social and humane
principles.
-Reported in 2008, Zimbabwe was named the second worst country to ever suffer from
hyperinflation, just behind Hungary the postwar period. After every 25 hours, prices
were automatically doubled. The government issued the most valuable cash papers
which were valued at 100 thousand billion to cope up with the dire situation but it was
just enough for a weekly bus ticket. Besides, the monthly inflation rate of Zimbabwe
was calculated to rise to 3,5 million %. 50 million Zimbabwe dollars was merely
affordable for an egg. A loaf of bread was priced equal to buying 12 cars but 10 years
ago.
-In addition, the infamous global economic crisis in 2008 created a ripple of effects to
almost every economy and Zimbabwe’s was not an exception. Combined with the
inefficient domestic economy and accumulated debts, Zimbabwe was announced to be
the first country in the 21st century to endure hyperinflation. Despite efforts from the
government to reduce expenditure, pay off public debts by raising taxes, they still failed
to save the economy due to extended worker’s strikes. Urgent national problems led the
government to issue more and more cash to pay off debts for laborers, which made the
hyperinflation status quo an irreversible crisis.
-Acknowledge the urgency and adverse consequences caused by hyperinflation to a
macro economic scenario and Zimbabwe’s in particular, our group has come to a
consensus that this would be the topic for our course’s report. Our work will examine
the root causes of hyperinflation, disastrous repercussions and therefore withdraw some
of the lessons and experiences to illustrate how to avoid hyperinflation in an in depth
manner.

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2. Research purposes:
-Our team will scrutinize the topic with 3 specific purposes:
 Analyze the root causes and hyperinflation’s impacts to Zimbabwe’s economy
 Examine how the government of Zimbabwe dealt with the situation.
 Lessons learned to avoid hyperinflation and suggested solutions.

3. Research target and scope:

-Target of the study: Hyperinflation crisis in Zimbabwe.
-Scope of the study:
 Limitations of space: investigate hyperinflation’s causes, impacts and the
government solution in Zimbabwe
 Limitations of time: from 2007 to 2009

4. Research method:
-Our team incorporates both the quantitative and qualitative approach into the study to
look into the crisis:
 The qualitative approach: analyze, compare, sum up several opinions coming
from the citizens of Zimbabwe at the time examined to gain better knowledge of
how it impacts activities of the economy.
 The quantitative approach: utilize the model AS-AD to analyze the theoretical
causes of hyperinflation and gather information throughout the period studied to
learn the crisis’s repercussions. Secondary data is our team’s main source of
information. We look for sources, data, information from websites, magazines,
channels, scientific research regarding the same issue domestically and
internationally to approach the crisis in Zimbabwe

5. Research structure:
-The study comprises of 3 chapters as follows:
 Chapter 1: Theoretical base of knowledge with regards to inflation, thereby
hyperinflation’s causes, impacts and solution to curb the dire situation.
 Chapter 2: Analyze hyperinflation crisis in Zimbabwe in the span between 2007
to 2009

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  Chapter 3: Examine how the government solved the problem and withdraw
lessons and experiences on how to avoid hyperinflation.

CHAPTER 1: THEORETICAL BASIS

1. Definition of inflation
-Inflation is an economic phenomenon in which the price of goods and services
continually rises as measured against a standard level of buying power, while the
supply of goods and services declines as money devalues.
-Inflation aims to evaluate the total impact of price changes for a diverse range of goods
and services, and it provides for a single value representation of an economy's growth
in the price level of goods and services over time.
-Cagan (1956) defined hyperinflation as "beginning in the month the rise in price
exceeds 50 percent and as ending in the month before the monthly rise in prices drop
below that amount and stays below for at least a year". This equates to an annual rate
of 13,000 percent.

2. Types of inflation
2.1 Creeping Inflation
When prices grow by 3% or less each year, this is referred to be creeping or mild
inflation. According to the Federal Reserve, price increases of 2% or less enhance
economic development. Mild inflation raises consumer expectations that prices will
continue to rise, which promotes demand. Consumers buy now to avoid higher future
pricing. Mild inflation fosters economic growth in this way. As a result, the Fed's target
inflation rate is set at 2%.

2.2 Walking Inflation

Walking inflation ranges between 3% and 10% each year. It is bad to the economy since
it accelerates economic growth. People begin to buy more than they need in order to
avoid paying significantly higher prices later. This increasing purchasing drives demand
even higher, to the point where providers are unable to keep up and neither can salaries.
As a result, most basic goods and services are priced out of most people's grasp.

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2.3 Galloping Inflation
When inflation reaches 10% or above, it has a devastating effect on the economy.
Money depreciates so swiftly that business and employee earnings can't keep up with
rising costs and prices. As a result, foreign investors shun the nation where this occurs,
depriving it of much-needed cash. The economy deteriorates, and government officials
lose credibility. Inflationary pressures must be avoided at all costs.

2.4 Hyperinflation
When prices rise by more than 50% each month, this is referred to be hyperinflation.
While hyperinflations are quite rare, once they start, they may quickly spiral out of
control. In reality, the majority of cases of hyperinflation occur when governments
inflate money to fund wars.

3. Inflation and hyperinflation: Causes

3.1 Monetarist view of inflation:
-An aggregate demand and aggregate supply framework is used by monetarists to
explain the cause of inflation. We suppose that if the money supply increases, the
aggregate demand curve moves rightward, starting at a point where output is at the
natural level. The rate of output may rise above the natural rate. Wages will rise when
unemployment falls below the natural rate level, and the aggregate supply curve will
quickly move leftward until the economy returns to its natural rate level. The price level
increased at the new equilibrium. The final result of a constantly rising money supply
is a constant price increase. Money growth is the only cause of inflation in monetarist
analysis because the money supply is considered as the only source of shifts in the
aggregate demand curve.
-Monetarists use the idea of velocity of money, defined as the speed of circulation of
one unit of money, to demonstrate that changes in aggregate expenditure are primarily
influenced by changes in the money supply. V= (P*Y) / M is the velocity determined
by dividing nominal spending P*Y by the money supply M.
-By multiplying both sides by M, we obtain the exchange equation. If velocity V is
considered to remain constant, this equation becomes the contemporary quantity theory
of money, which describes how aggregate spending is determined. Aggregate

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expenditure will rise in the same proportion as the money supply grows and the velocity
remains unchanged.

3.2 Keynesian view of inflation

A dramatic rise in money supply, according to Keynesians, will cause the price level to
climb at a rapid rate constantly. There are no other causes that can lead to a significant
increase in inflation. Inflation cannot be caused solely by fiscal policy or supply-side
phenomena. A negative supply shock does indeed move the aggregate supply curve
backward, resulting in output below the natural rate level and a higher price. Because
unemployment is higher than the natural rate, the aggregate supply curve will return to
its initial position. At the initial price level, the economy returns to full employment.
When it comes to fiscal policy, a one-shot increase in government spending results in
only a temporary increase in the inflation rate when output is over full employment, not
inflation that continues to rise. We could have a continuous rise in the price level if
government spending increased continuously, which violates Friedman's argument.
This argument, however, is inadequate because, as Keynesians recognize, government
spending cannot continue to rise continuously.

CHAPTER 2: THE HYPERINFLATION CRISIS IN ZIMBABWE

1. Context of Zimbabwe:
-Zimbabwe is a youthful country with considerable climatic and mineral resources.
Zimbabwe is rich in diamonds and some other minerals. During the 1980s and 1990s,
Zimbabwe was considered as one of the most developed and prosperous countries in
Africa.
-The currency of this country (Zimbabwe dollar) starting on April 15th, 1981. At first,
it was the 1, 5, 10 and 20 dollar banknotes. But in the late 2000s, every Zimbabwean
was paying hundreds of trillions of Zimbabwe dollars for an ordinary loaf of bread.
Zimbabwe's inflation had fallen to the highest level. In July 2008, a glass of beer was
doubled in price per hour.
-The government did nothing to solve this serious problem. The Reserve Bank just kept
printing more and more dollars. During the peak of the economic crisis in Zimbabwe in
2008, prices rose at least twice a day and people had to carry large bags of money to

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buy food such as loaves of bread or bags of milk. The inflation rate was so high that the
Reserve Bank of Zimbabwe issued banknotes with a denomination of hundreds of
trillions of dollars, which was the highest denomination in the world.
-In 2009, The Minister of Finance, Patrick Chinamasa, was forced to withdraw the order
of using the only local currency for transactions because people do not use local
currency in daily transactions. Also during this time, the government stopped reporting
the inflation indicators.
-Citizens are allowed to openly use USD, EUR and South African rand for transactions
and the US dollar was the most popular currency. According to banks, four-fifths of
transactions including transactions of domestically produced goods or payment of
wages to workers and securities transactions were in US dollars. Abandoning the
domestic currency was a brave decision of the Zimbabwe government because they
previously refused to.

2. Causes
-Hyperinflation is a difficult problem to deal with. By identifying possible causes of
hyperinflation, we can avoid it in the near future. In general, there are 3 main causes of
inflation. The first is demand-pull inflation when aggregate demand exceeds aggregate
supply. Second, cost-push inflation occurs when an increase in the cost of production
reduces aggregate supply, which increases prices. Finally, monetary inflation occurs
when the money supply increases continuously.
In this report, we will analyze deeply the causes of hyperinflation in Zimbabwe.

2.1 Land reform programme

-Firstly, the main cause of hyperinflation in Zimbabwe in about 1997 - 2008 was the
"Land Reform Program".
-During its colonial period and the early years of independence, Zimbabwe experienced
export activity with large-scale agricultural product export and was economically
successful, second only to South Africa. After independence, much of this country's
productive arable land is still owned by whites.
-During the 1990s, however, the government of President Robert Mugabe began
transfer of ownership. The Zimbabwean government redistributes land from farmers
available to black farmers. However, the new farmers had little experience so farmland

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was managed by people with a little bit of knowledge of agriculture and related
activities. They struggled to maintain production on a large scale in the past.
-As a result, the Land Reform Program reduced agricultural output, especially tobacco,
which accounted for a third of foreign exchange earnings. Wheat production that used
to be 300,000 tons in 1990 has also decreased 50,000 tons left in 2007

2.2 War funds

Next, Zimbabwe entered the Second Congo War from 1998 to 2002. The Mugabe
government printed more money to help finance the war. In 1998, despite the continued
deterioration of the economic situation, the President sent 11,000 troops to the
Democratic Republic of the Congo (DRC) to support Lauren Kabila. Their entry into
the war has depleted much of the country's monetary reserves, and Zimbabwe is
reporting its war spending to the International Monetary Fund perhaps $22 million a
month.

2.3 Government instability

-A government with severe unrest will not look attractive to foreign investors.
Companies do not want to do business in a country that is not safe to invest in and does
not have the security of asset ownership. Besides the war with the Democratic Republic
of the Congo, conflicts between the ethnic Ndebele minority and the Shona majority in
Mugabe have resulted in many clashes.
-Whites and blacks also have conflicts. It happened mainly due to the Land Reform
Program. Whites disagreed because they lost business ownership, so some white
business owners with experience in farming left the country. There is also violence to
suppress opposition politicians, thereby eroding confidence in the future of the country's
politics.

2.4 Hope decreasing

-People and foreign investors lack confidence in the country's future and lose
confidence in the country's currency. This is largely due to:
- Corruption. Robert Mugabe's government was plagued with allegations of bribery and
corruption scandals. Zimbabwe was ranked 166th out of 180 countries in the world
according to Transparency International's Corruption Perceptions Index (CPI) in 2008.

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- Common poverty and unemployment. In 2007, nearly 80% of the population was
below the poverty line. Unemployment was also high even before hyperinflation
occurred.
- Higher denominations. Although the Reserve Bank of Zimbabwe continuously issues
higher denominations, Zimbabwe does not believe that the new currency will be more
stable than the old.
- Wrong economic decisions. A mistake in a government's economic judgment can
make people ineffective as they must focus on correcting the mistake. While this harms
the economy, it does not necessarily reduce the value of the currency but can harm
confidence in the future.

2.5 Inappropriate price control

-The government wanted to keep prices affordable for consumers and prevent rising
inflation. One of the things they did was impose price controls (price ceilings) on
domestic goods and services. This made the previous supply shortage even worse. This
was because when production costs such as wages, raw materials and imported goods
increase, it is difficult for suppliers to continue to supply goods and services at the
ceiling price, unless they sell through the black market. So government price controls
backfired and exacerbated actual shortages and inflation. Thus, the above reasons have
caused the government budget deficit to increase rapidly.
-In addition, increasing government spending while tax revenue is decreasing causes
the government to continuously print more money to pay for expenses and repay debt
and as a result, a severe hyperinflation crisis in Zimbabwe

3. Developments:
3.1 Before hyperinflation:
-The Republic of Zimbabwe gained independence on April 18th, 1980 and their official
currency was the Zimbabwean dollar. Economic growth was steady during the early
years of independence, so the Zimbabwean dollar was worth more than the US dollar
at the official exchange rate.
-In 1997, the government launched the Land Reform Program, which was the first move
to worsen the economic situation. Zimbabwe experienced a severe decline in food
production and all other sectors as a result of this policy. The banking industry also

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collapsed, making farmers unable to borrow money. The International Monetary Fund
(IMF) refused to refinance and cancel debt because the IMF wanted to punish the
country because it disagreed with Zimbabwe's policy of taking land from white
landowners.
-In addition, Zimbabwe was involved in the Second Congo War, so Robert Mugabe,
President of Zimbabwe needed cash to spend on his army and pay his soldiers. So, when
a government needs money, it will often try to generate income for the country through
a variety of economic strategies such as increasing exports to other countries and
attracting foreign investors. But Robert Mugabe had another idea that would shock the
world. The idea is that the government will print more money to pay off foreign debts
and public servants like soldiers and policy.
-Unfortunately, things have turned worse, an increase in the money supply does not
equate to an increase in the productivity of the Zimbabwean economy, and only some
new investments are real to create new goods. In other words, citizens now need more
dollars to buy the same amount of goods as before.

3.2 During Hyperinflation:

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-From the Table above, the estimated inflation rate for November 14, 2008 is
79,600,000,000%.
-Prices doubled every 24 hours. When prices started to rise, the government
responded by printing more money. So the cycle continues and commodity prices
continue to rise. Because the price was so high, the government had to print money with
a higher denomination. At first they printed 1 million Zimbabwe dollars, then they
printed higher denominations of 100 million. Then it was 10 billion and then 100 billion
dollars.
-In 2008, prices started to increase by thousands of percent per month, so the
government started printing 100 trillion dollars. Zimbabweans became billionaires but
that money was worthless because basic goods were still worth billions of dollars.
-In late 2008, a large bank's ATM had a data overflow error, preventing people from
withdrawing money with too many zeros. Despite some efforts to control inflation, the
Zimbabwe dollar was officially phased out on April 12, 2009 and in 2014 the Central

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Bank of Zimbabwe recognized the US dollar and several other currencies as legal
tender.
-During hyperinflation, goods and services in Zimbabwe witnessed record high prices,
reflection with some of the following items.

No. Product/Service Quantity Price (Zimbabwe dollar)

1 Bread 1 loaf 300 billion

2 Eggs 3 eggs 100 billion

3 Milk 1 cup 3 billion

4 Oil 2 liters 5 billion

5 Petrol 4 liters 40 million

6 Bus ticket 1 ticket 10 million

7 Interest rate 600 % (March 2007)

3.3 Hyperinflation to present day

-In January 2019, the government of President Mnangagwa decided to sharply increase
the prices of gasoline (from $1.24 to $3.31 per liter) and diesel (from $1.36 to $3.11 per
liter) from January 13, 2019 due to a serious shortage of fuel supply, which is considered
as the worst situation over a decade, because of a lack of foreign currency. The situation
was exacerbated when people protested, the central bank announced a new monetary
policy in February 2019, the prices of goods and services skyrocketed at an
unprecedented rate of inflation.
-The establishment of the interbank exchange market caused prices to increase by
300%. The price of a loaf of bread increased from $1.8 to $3.5 and the price of a box of
butter increased from $8.5 to $17. The price crisis was recalling memories of a decade
ago when hyperinflation peaked at 500 billion percent, ditched the Zimbabwean dollar.

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-According to the National Bureau of Statistics, in 2020, Zimbabwe's inflation rate
increased to more than 800%, but it started to trend downward compared to the same
period last year officially at 106.64%, and the inflation rate dropped to 50.24%.

4. Consequences
-As we all know, hyperinflation can bring many bad effects to any country that is
experiencing it. This can be seen throughout the history of hyperinflation in the world.
Professor Steve H. Hanke, an American applied economist at Johns Hopkins University
published a journal with the Cato Institute listing the worst episodes of hyperinflation
of all time:

-From the table above, we can see that even the German hyperinflation of 1923 could
not match Zimbabwe's hyperinflation, as this is the second worst inflation rate in

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history. All of the countries in this table experienced severe economic problems during
peak inflation. In addition to the problems that arose during the hyperinflation in
Zimbabwe, there were many long-term effects that could only be seen after 2009, which
is several years after the country reached its peak of inflation. Some of the problems
include:

4.1 Decreasing the value of savings and retirement money

-People lose their savings because their purchasing power decreases. People with
certain types of assets have seen their value drop in a flash. Old retirees with fixed
incomes are hit hardest as the pensions they receive become worthless.

4.2 Increasing unemployment rate

-Unemployment rate in Zimbabwe from 1999 to 2020 (Excerpt from worldbank.org)

The World Factbook ranks Zimbabwe's unemployment rate as the highest in the world,
at 95% in 2009. Many Zimbabwean businessman went bankrupt between 2000 and
2014 due to the economic downturn so a lot of people lost their lives.

4.3 Food crisis

People in Zimbabwe have experienced food scarcity and most of them continue to
survive by eating at least one meal a day if they are lucky enough. A drought in the mid-

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2000s reduced food production, adding to the fire. Millions of people depend on food
aid. In 2013, Zimbabwe had 1.6 million people starving and had to receive aid from
Europe and America.

4.4 Decreasing average life expectancy decrease

Life expectancy in Zimbabwe has decreased and the country has become the country
with the lowest life expectancy rate in the world. This is directly affected by the food
crisis, high unemployment rate, widespread disease and high drug prices.

4.5 Population shift

The people of this country have fled to neighboring countries or displaced within
Zimbabwe itself. An estimated 3 million Zimbabweans live outside the country for a
better life.

4.6 Menu cost

The entire country incurs the cost of reintroducing price lists, fares, labels and restaurant
menus as they need to be constantly updated. Businesses have had to spend time and
money adjusting their prices. For example, bus tickets are priced differently in the
morning and evening.

4.7 Poor billionaires

Prices of goods and services rise faster than wages and salaries. Even though people get
a salary of four million Zimbabwe dollars, they don't use it because food prices are so
much higher. For example, a sheet of toilet paper (not a roll) costs $417.

5. Measures the government can and should carry out in order

to help the country abstain from the current state of
hyperinflation
5.1 Dollarization of the economy
-In the history of development of Zimbabwe, the country cannot forget the record
number of inflation of 23 million percent (23,100,100%) in July 2008. Unexpectedly,
dollarization of the entire economy played an important role in combating
hyperinflation in Zimbabwe.
-The global economic crisis in 2008 had a huge impact on most of the world's
economies. Zimbabwe was one of the wealthy countries in Africa in the 1980s, but by

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July 2008, hyperinflation reached 23 million percent (23,100,000%) in this country,
leaving 80% of workers unemployed.
-It is hard to believe that after only 2 years, Zimbabwe has successfully controlled
hyperinflation and we can delve deeper into this in Chapter 3, in which the application
of the policy of dollarization of the economy will be exploited thoroughly.
-According to Steve Hanke, the dollarization of the economy has various advantages
such as cutting hyperinflation immediately, quickly reducing deposit interest rates, and
stabilizing the national budget. However, this is only a short-term policy and does not
guarantee national competitiveness. Therefore, in the long term, the Zimbabwean state
needs policies that can guide the country's economy to become more stable and
sustainable. And through careful findings and research, there have been proposed
policies that the Zimbabwean government should implement so that the economy can
improve in a sustainable way. More specifically, these are the policies:

5.2 Modification of economic policy and a new policy construction

Although some western countries disagree with Zimbabwe's Land Reform Program and
want to abolish it, we just think it should be revised and implemented correctly. The
purpose of this policy is good but it is not fair to the majority of the population that are
black Zimbabweans that white people still own farmland even after independence. This
policy has the same aim as Malaysia which has tried to regain lands owned by British
companies through various strategies such as the Dawn of 1981 Raid. However, the
mechanism for implementing The land reform is substandard because most of the new
owners don't know how to manage it. The government should choose new owners with
knowledge of agribusiness or set up a state-owned company to manage it.

5.3 The money supply control

The money supply must be regulated. This is to ensure that the money supply does not
grow faster than the economy's real output and matches the productivity of the
Zimbabwean economy. Robert Mugabe's idea of printing more money to pay off foreign
debts and finance the war was the main cause of this economic disaster. The Reserve
Bank of Zimbabwe must be disciplined about creating more money. The government
should have learned from Germany's history, where it also printed too much money and
experienced hyperinflation.

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5.4 Foreign investors attraction by eliminating corruption
Mugabe's government is plagued by corruption scandals in the country. The United
States and the European Union have imposed economic sanctions targeting 200 of
Mugabe's family and close friends. Their foreign assets have been frozen in Europe.
Much of the farmland taken from white farmers ended up in the hands of politically-
connected people. Some army generals also receive it as a reward. Policy can be
successful if it is not given to people who have no knowledge of agribusiness. When a
government is transparent, it will create trust from the people and foreign investors.
This will attract Foreign Direct Investment (FDI). Therefore, it is considered beneficial
for the economy of the country because the money inflow can create jobs to reduce the
unemployment rate.

5.5 Reduction of military spending and conflict avoidance

Money spent on war with the Democratic Republic of the Congo could be used to
improve infrastructure such as schools, hospitals and roads in the country. There are
also internal conflicts between the ethnic Ndebele minority and the Shona majority in
Mugabe. These conflicts have led to much violence and it is disliked by foreign
investors. People who conduct business will not feel safe and they also need to spend
more money on security. A country with a safe environment will attract foreign direct
investment and increase confidence in its future.

5.6 Relations-strengthen with other countries

Zimbabwe must begin to make peace with the United States, United Kingdom,
Germany and other European countries. As Robert Mugabe has now resigned, the new
president, Emmerson Mnangagwa is ready to strike a new deal with the International
Monetary Fund (IMF). Zimbabwe should renegotiate with foreign lenders such as the
World Bank and the IMF. The country also needs the contribution of the international
community. China and its neighbor - African countries are some possible candidates to
pour money into. Zimbabwe must find a mutually beneficial arrangement, such as a
promise to provide them with some projects once the Zimbabwean economy recovers.
Former finance minister, Tendai Biti said that Zimbabwe must seek a new relationship
with Beijing based on equality and respect as well as with New Delhi, as India has
become so significant that they can use it to boost their economy.

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CHAPTER 3: ZIMBABWE’S RESPONSE TO ITS
HYPERINFLATION
1. Dollarization
- Zimbabwe's hyperinflation skyrocketed in 2008. The average GDP per capita fell to
US$136, the lowest level in 53 years (at 2005 constant price). The Zimbabwean
government's first attempt to manage inflation was to impose price controls on essential
commodities by compelling merchants to sell goods at set rates. In June 2001, the Grain
Marketing Board was monopolized, primarily to control wheat and maize prices. The
government gradually began to regulate the wholesale and retail prices of other
commodities.

- This finally resulted in market shortages, and there were moments when supermarkets
were completely out of stock. (2001 IMF Staff Report).

- In 2006, 2008, and 2009, the currency was redenominated several times. By December
2008, the use of foreign currency as a medium of exchange had nearly reached
saturation, albeit unofficially, and the central bank had licensed around 1,000 shops to
sell goods in foreign currency, ostensibly to help businesses suffering from chronic
foreign currency shortages import goods and spare parts. This was Zimbabwe's first
conscious recognition of unofficial dollarization; yet, the central bank's action was
purely political in nature. When it was realized that the country had de facto dollarized
and that the government was still collecting taxes in the worthless local currency, the
decision was made to support the ruling regime by increasing the amount of foreign
currency flowing into its coffers by collecting hard currency taxes from 1,000 shops
while criminalizing the use of foreign currency in the informal sector, where it could
not collect taxes. This revealed to all that the government was self-serving; on the one
hand, it was still paying civil workers’ salaries in the worthless Zimbabwean currency,
while at the same time expecting them to be able to buy needs in shops with foreign
cash. The minister of finance conferred legal tender status to the South African Rand
and the US dollar in January 2009, a month after the licensing of 1,000 shops,
completing official dollarization. Local currency was confined to being used in small
transactions and for change, similar to how local coinage are used in other officially

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dollarized economies. In this context, the opposition leader was sworn in as Prime
Minister as part of the September 2008 power-sharing deal, following a compromise on
cabinet post allotment. The establishment of official dollarization, bolstered by political
accommodation, had the obvious immediate effect of halting hyperinflation, and the
country actually entered deflation, with consumer price inflation at -2.34 percent and -
3.26 percent, respectively, at the end of January and February. Bilateral donor aid began
to flow into the country, and the country predicted positive growth for the first time in
almost ten years (Ministry of Finance, 2009). Though the IMF approved targeted
technical assistance in the areas of tax policy and administration, payments systems,
lender-of-last-resort operations and banking supervision, central banking governance
and accounting to Zimbabwe in May 2009, the country's relations with the Bretton
Woods financial institutions have yet to normalize. The resumption of collaboration
was based on the observation of a significant improvement in the Zimbabwean
government's cooperation on economic policies to solve the country's debt challenges
(IMF, 2009). On the other hand, the bank has yet to resume any type of engagement
with Zimbabwe, citing the lack of conditions suitable to a full-fledged economic
development program with the country (World Bank, 2009).
- However, high denominations such as Z$100 trillion were still utilized (making it the
world's largest note), eventually leading to the introduction of the fourth Zimbabwean
dollar (2009), which made 1 trillion dollars equal to one new dollar.
- Both of these efforts, however, had little impact. In February 2009, the authorities
ultimately established a multicurrency system, in which five foreign currencies were
designated as official, and the US dollar was designated as one of the principal
currencies for government-related transactions. In 2009 and 2010, the budget
expenditure allocation was done in USD, and the native currency was eliminated until
2012.

2. The effect of Dollarization

-The creation of a multi-currency system helped boost the country's economy and
brought discipline back to the market by financing the budget. As a result, the economy
in Zimbabwe has shown certain improvements. Real GDP growth rate grew from almost
-20% in 2008 to around 7% by the end of 2009.
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(Source: MECOmeter)
-The prices of commodities became more stable and the inflation problem dropped to
single digit values between 2010 and 2012. The cost of transactions to the government
reduced significantly for business transactions with the US because of dollarization.
Dollarization contributed to the promotion of agriculture. Zimbabwe was an agriculture
based economy with around 80% of the population living as small farmers in rural areas.
The agriculture sector, hence, played a big role in the economy, it registered a growth
rate of 17% between 2009 - 2012 and a gain of 24.3% in productivity. The
manufacturing, mining and quarrying sectors too contributed immensely to the growth
in GDP.
-As a result, dollarization became a success for Zimbabwe's struggling economy.
However, it also poses some specific challenges for the country's future. The
hyperinflation has shaken the confidence of people in the financial institutions of the
country and people started keeping their foreign currency transactions outside the
financial system.
-Besides, the import and export of Zimbabwe, mainly to South African countries, is
heavily influenced by the USD/Rand exchange rate. The transportation of goods has

22
also become extremely difficult and this has greatly affected the competitiveness of
Zimbabwe with countries around the world. Another major disadvantage of
dollarization is the loss of seigniorage money (the income earned from the issuance of
money) - a huge contributor to the government's revenue in times of hyperinflation.
broadcast.
-Zimbabwean politicians and senior officials are also very concerned that dollarization
could bring unwanted erosion of sovereignty and monetary independence. For them,
dollarizing and abandoning the country's currency is also claiming that they will lose
the country's sovereignty and pride.
-However, with the economy gradually recovering and economic systems adjusting to
dollarization, banks are forced to adopt competitive and transparent practices, hence
leading to stability in the banking system. By the end of 2009, the total bank deposits
increased by 750% from the December 2007 level. The stable exchange rate, lack of
monetization of the budget deficit and absence of black markets compensated for the
disadvantages of dollarization and lack of control over the monetary policy

CONCLUSION
According to the essay, hyperinflation in Zimbabwe exhibits nearly all the hallmarks of
classic hyperinflation that a country suffering a growing fiscal deficit would be sensitive
to both internal and external fiscal shock. When inflation hit, financial authorities tried
to manage and rectify an inefficient tax system, while continuing to print additional
money in the meanwhile, which caused the inflation to get worse. As inflation
worsened, the financial authorities were forced to print ever-increasing amounts of
money. To sustain tax revenue at the time, the government implemented measures such
as price control and suppressing the black market. Thus, the government's constant
printing of money to meet its needs is the primary cause of hyperinflation, undermining
the value of the Zimbabwean dollar and driving up the prices of imported products.
Hyperinflation is harmful to all markets, including currencies, investors, labor markets,
materials, and fuels. Therefore, various steps were taken by the government to curb the

23
inflation: redenomination of the currency, a shift to the multicurrency system and then
finally, complete dollarization. Despite dollarization’s set of disadvantages, the
country's economy steadily rebounded, bringing stability with it. There were significant
economic improvements, with the real GDP growth rate climbing from -14.4 percent in
2008 to 3.7 percent by the end of 2009. By 2012, unemployment had decreased and
inflation had fallen to single digit levels. The government now is focusing on better
budget planning, restructuring of banking in the country, and paying off the huge debt
that the country bears.

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