Zimbabwe’s inflation crisis, explained

Zimbabwe’s official inflation rate shot up more than 10 points to 42.1 percent in December 2018, a crisis brought on by a foreign currency shortage and government-mandated price hikes on fuel, leading to shortages and instability. In fact, Zimbabwe’s official statistic may understate actual inflation because of a discrepancy in the price of goods when paid for electronically or with currency. Citizens are struggling to use bond notes to pay for essential items, and cannot easily access their funds. What remains to be seen is whether a new government can reverse the effects of the previous Mugabe regime and bring some much needed economic stability to the country.

The Crisis of 2008

Inflation crises aren’t new in Zimbabwe. The country went through a staggering case of hyperinflation in 2008, caused by the perfect storm of agricultural decline, involvement in the Congo War, and U.S. sanctions against the Zimbabwean government. In November 2008, the inflation rate finally peaked at 79 billion percent that month. Zimbabwe was forced to give up its currency altogether as the rate of exchange had become 35 quadrillion Zimbabwean dollars to 1 U.S. dollar. In place of the Zimbabwean dollar, Zimbabwean citizens adopted the U.S. dollar, the Chinese renminbi, the South African rand and other foreign currency to conduct business.

The 2008 episode of hyperinflation was one of the worst cases in the world. Zimbabweans suffered from shortages of electricity, water, fuel, and food. The problem was compounded by the failure of the government, headed by President Robert Mugabe, to enact any meaningful policy. In response to the economic decline and rising government debt, the government printed more money, which increased the rate of inflation. Though adopting foreign currency in 2009 curbed the crisis’s excesses, it was never completely solved.

In 2017, a military coup forced Mugabe to step down from office, and Zimbabwe had its first true elections since Mugabe took power 37 years prior. However, the Zanu-PF, the party leading the government today, has struggled to reverse the effects of the Mugabe administration – entrenched corruption, spending beyond the country’s means, and uncoordinated policy actions. These problems are deeply rooted as a result of years of dictatorial governance in Zimbabwe, and though Zanu-PF and the new finance minister may be taking the right steps towards economic stability, these changes are not happening quickly enough.

Cash shortage

Right now, Zimbabweans lack spendable money. Banks, having run out of foreign currency, are unable to allow citizens to access their deposits except through a domestic currency called the Zollar. Banks are permitted to give out twenty Zollars to each of its account holders per day, but they cannot be redeemed internationally, nor at many businesses. While the government maintains that the bond notes are equal to U.S. dollars in value, the notes are worth four to five U.S. dollars on the black market. Though the government has tried to abate the currency crisis by increasing the flow of U.S. dollars into the country – via methods such as requiring tourists to pay in USD – the increase in cash has not been enough to offset the use of bond notes.

One obstacle to a potential solution to the currency crisis is the existence of service charges on electronic payment methods. EcoCash, a mobile app that can be used for payments and is a likely substitute for physical money, charges a large service fee that many Zimbabweans cannot afford. Credit card payments also involve these service fees, and so many vendors do not accept cards in lieu of cash. Although electronic payment methods are more reliable than government-issued banknotes and allow consumers to access their money holed up in bank accounts, the relatively infrequent adoption of e-payment methods in shops and the prohibitive transactions fees discourage their use.

Citizen response

The government has assured the country that the Zollar notes are merely a necessary step towards stability, but people are not convinced, fearing that they will lose their savings as they did in 2008. The banks’ inability to give out anything more than twenty bond notes a day has people worried and frustrated that they are working but not receiving adequate compensation. The people of Zimbabwe, once hopeful that the end of the Mugabe government would bring prosperity, are increasingly distrustful of the new government.  

Services, both essential and luxury, have either ceased to operate or greatly cut down on their availability. Foreign companies, such as Kentucky Fried Chicken, have closed their doors because they cannot receive payment in USD, a necessity for acquiring inventory from abroad. Grocery stores are rationing their products. The line for fuel stretches on for kilometers. Money transfers are now taxed at 2 percent. People are running out of options and turning to protest instead. Workers went on strike to demand salaries paid in dollars. When the government mandated a 100 percent price hike in fuel prices, citizens staged rallies in Harare and Bulawayo. The government needs time in order to be able to solve the problems that caused this crisis in the first place, but to gain the trust of the people, they must act quickly.

Author: Ananya Murthy

Ananya Murthy is a staff writer at The Compass. She is a freshman in the Elliott School of International Affairs interested in international economics and human rights issues. In addition to writing for the Compass, she is a member of the GW Mock Trial team and of University Singers.