We thought that the epoch of hyperinflation under the regime of Robert Mugabe was a thing of the past. But it seems that the economy of Zimbabwe has a notorious relationship with inflation; especially hyperinflation. It is interesting to see that hyperinflation is generally an economic condition that happens rarely. But in the case of Zimbabwe, hyperinflation is a recurring economic condition that depletes the Zimbabwean economy. Why hyperinflation, an inherently rare economic condition, became a recurring condition in Zimbabwe?
First, it is important to reiterate once again that hyperinflation is a rare economic condition that happens to economies. For it to happen, a country must experience a series of financial crises without effectively managing them. And there are generally four stages that lead to hyperinflation.
In the first stage, the country builds up high levels of debt, either private, public, or both. And some of this debt is denominated in foreign currency.
In the second stage, a crisis; whether political, economic, or financial; happens and severely damages the country's productive capacity. This causes government tax income to fall, which, in turn, causes the fiscal deficit to widen sharply. As a result, the country’s sovereign currency exchange rate starts to fall relative to other countries and inflation starts to rise.
In the third stage, the economic crisis and rising fiscal deficit damage confidence in the government, which loses its ability to borrow from financial markets or from its own citizens. So the government chooses to print money via the central bank to finance its obligations.
In the fourth stage, as money printing becomes widely recognized, the last vestiges of confidence in the government are destroyed.
These four stages took place during the reign of President Mugabe and led the Zimbabwean economy into deep hyperinflation. And these four stages repeated themselves again and this is why we are currently witnessing hyperinflation in Zimbabwe again. There are two longstanding fundamental drivers of inflation in Zimbabwe. The first is monetary expansion which is not supported by economic growth. Indeed, when there is more money in the economy than goods and services that can be purchased with it, its purchasing power falls and prices increase. The second driver relates to what Zimbabweans now expect when it comes to inflation. Expectations are usually anchored when prices of goods and services are stable over time and consistent with what people expect to pay for them. In Zimbabwe, this is no longer the case—expectations have been de-anchored. This happens when prices differ from what people expect. If they are getting higher, this can have an inflationary effect by driving up wages and demand for goods and services. Higher wages and demand in turn could push prices even higher, thus making inflation expectations self-fulfilling.
The Zimbabwean government relaunched the Zimbabwean dollar in 2019 after a decade of dollarization, but in 2020, it authorized the use of foreign currencies as part of measures to respond to the COVID-19 pandemic. But since the pandemic, Zimbabwe adopted again the dollar. Prior to August 2022, Zimbabwe’s inflation rate was at 285%. Since August 2022, this rate has been falling. But in March 2023, inflation is running at 87.6%, forcing Zimbabweans to find creative ways to survive. A recent International Labour Organization Harare report asserts that 76% of employment in Zimbabwe is not in the informal sector, in other words, selling goods or services without registering with the authorities. The informal economy, massive bank charges and distrust of the banking sector mean Zimbabweans prefer to deal in cash or mobile money.
A married father-of-five, Mr. Ngwenya supplements his unpredictable trade by selling fruit and roasted corn on the side. “Things used to be good but these days, business is slow,” he said. “Sometimes, you can be lucky and have someone bring you a torn $100, some days you have to make do with the $1 and $2 notes.” Of Zimbabwe’s estimated 5.2 million traders in the informal economy, 65% are women. The government wants to formalize this growing sector of the economy as part of a national strategy to increase tax revenues. It is clamping down on small businesses, sending law enforcement officers to inspect trading licenses and fine those who are non-compliant.