The economic condition in Zimbabwe is worsening. Ordinary citizens are struggling to keep up with inflation which is reached at triple-digit figures. The annual inflation rate in Zimbabwe climbed to a record high of 521.2 percent in December 2019 from 480.7 percent in the prior month, mainly due to higher prices of food & non-alcoholic beverages (719 percent vs. 672 percent in November) amid shortages of basic food including maize and corn amid the worst drought in almost 40 years. Also, cost continued to rise for housing & utilities (269.5 percent vs. 189.3 percent), reflecting hikes in electricity tariffs introduced in October to boost revenue for more power supply. Shortages of hydropower-produced electricity have left the country unable to produce enough energy to meet requirements.
Now inflation is on the rampage again, devouring household incomes at a time of chronic food and fuel shortages. Zimbabwe halted publication of annual inflation data in August 2019 — a sure sign then that the government saw the pear in the shape of things to come — but it is reckoned to have hit more than 500% in December, and the sky is probably the limit.
Prices of basic products are now beyond the reach of many, with inflation topping 175% in June before the government stopped publication of annual inflation figures, saying they were misleading.
Zimbabwe farmers used to drive the economy generating wealth and mass employment but the land is less productive than it was.
policy uncertainty and a continuation of foreign currency market distortions
are exerting pressure on the exchange rate, the IMF added, while a severe
drought and foreign debt hampering Zimbabwe’s access to external funding have
impacted the economy hard.
Inflation rates during 2001-2009
This is not the first time Zimbabwe has experienced high inflation. Government figures show Zimbabwe’s peak inflation rate was 79.6 billion percent month-on-month and 89.7 sextillion percent year-on-year in mid-November 2009.
With the economy in decline, government debt increased. To finance the higher debt, the government responded by printing more money, which caused more inflation. Inflation meant bondholders saw a fall in the value of their bonds and so it was hard to sell future debt.
The entire financial system became undermined, banks closed and were unwilling to lend any money. Due to rising prices, the value of debt wiped out. But, this meant business and individuals had no access to credit. Normal business activity closed down and investment was cut back.
The Zimbabweans then adapted to foreign currency as a legal tender mainly US Dollars to end hyperinflation. It is also known as Dollarization. Zimbabwe dumped the Zimbabwe dollar in February 2009 after its value had been ravaged by hyperinflation over the decade to 2008, with inflation peaking at 231 percent at the last official count before dollarization.
Dollarization is the term for when the U.S. dollar is used in addition to or instead of the domestic currency of another country. It is an example of currency substitution. Dollarization usually happens when a country’s own currency loses its usefulness as a medium of exchange, due to hyperinflation or instability.
Dollarization allowed Zimbabwe to eliminate exchange rate risks, build real savings, boost lending rates, improve the investment climate, resume financial intermediation, reduce transaction costs in trade and retool production through accessing foreign lines of credit. The local currency has failed the above in less than 6 months.
During February 2019
In February, bond notes
and electronic cash were re-branded RTGS dollars and allowed to float to try
and crush the black market. Central
bank ditches 1:1 peg between dollar and bond note.
The British pound, United States dollar, South African rand Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe.
The minister said no country in the world has succeeded in growing and transforming its economy while using a foreign currency.
During June 2019
The rushed introduction of the Zimbabwean Dollar in June 2019, before addressing key macroeconomic fundamentals and instituting governance reforms has been nothing short of a disaster for the Zimbabwean economy. Erosion of incomes for labor and commerce has been complemented by billions of losses in US Dollars for pension funds and the Zimbabwe Stock Exchange (ZSE) market.
Zimbabwean dollar with effect from the 24th June 2019, is the sole legal tender in Zimbabwe in all transactions.
Ways to revive Zimbabwe’s economy
- Dump damaging policies such as IEEA. (In 2009, Mr. Mugabe signed the Indigenisation and Economic Empowerment Act (IEEA) into law, which aimed to place 51% of companies into the hands of Zimbabweans. Even some Chinese companies have been forced to close their operations in Zimbabwe in recent years because the IEEA made it unprofitable to do business in the country).
- Stamp out corruption.
- Negotiate international debt taken and defaults made with foreign lenders i.e. World Bank.
- Create conditions to reduce unemployment.