What Happens in Zimbabwe in Terms of Inflation?

Zimbabwe’s present difficulties exemplify the worst effects of mismanagement in the country’s economic system. Because of hyperinflation, living standards have plummeted and the economy has collapsed. As much as there is disagreement on who is to blame for the nation’s slump, there is a need for answers.

Because of the lack of a strong stabilization plan, hyperinflation in sub-Saharan Africa will continue to devastate both individual well-being and regional stability. It is the goal of this thesis to give a better knowledge of current and historical examples of hyperinflation and to make fundamental findings and recommendations that may be used as a basis for policy solutions to this issue.

As a result, it joins a notorious group of countries whose policies have fallen into the same trap. To explain these previously unknown occurrences, new hypotheses were developed to explain the results, which differed so drastically from standard economic behaviour.

As Europe’s financial institutions began to crumble after World War II, the first studies in this field were published. As a result of these classic articles and publications, any study of hyperinflation is built on solid foundations. Economics has created new ways of analysis and explanations for the current economic mismanagement, as international finance continues to change.

As Rome was not created in a day, neither was Zimbabwe. As a former British colony, Rhodesia, Zimbabwe has seen numerous changes, some of which have brought wealth, while others have brought hardship. This section will examine the historical events that impacted the current situation in Zimbabwe in order to have a better understanding of the country’s deteriorating economy. In every incidence of hyperinflation, bad luck and poor choices have conspired to bring it about. Zimbabwe is no exception. This section will briefly explore Zimbabwe’s colonial past, but will focus more on Robert Mugabe’s time in power.

Foreign exchange auction trading system launched by government in 2020 after failing to manage inflation rate using interbank rate system. Bidders determine their own exchange rate. In addition to that, those people who are involved in the Forex market are aware of the main risks of Forex trading, which is one of the most crucial things to know until you start trading FX. Because of that, the state’s government tries to increase the awareness of investors in order to make the country’s inflation decrease.  “The industry’s capacity utilization has gradually increased,” says Confederation of Zimbabwe Retailers president Denford Mutashu. “The implementation of the foreign currency auction system has stabilized the purchase of forex by businesses to import raw materials and capital goods.”

His conclusion: “The foreign currency auction mechanism has begun to drive inflation down as shown in the fourth quarter of 2020.”

Zimbabwe’s inflation rate was over 385 percent per year in January, according to a US economist from Johns Hopkins University in the United States

However, this is a significant drop from the nearly 700 percent observed in May of 2020.

Zimbabwe – Central Bank VS Inflation

With an annual inflation rate of more than 30%, Zimbabwe’s Central Bank has announced plans to release larger denomination banknotes for the convenience of its citizens in order to combat the problem.

It will be impossible to buy a loaf of bread with the new 50 Zimbabwean dollar notes.

As part of steps to enhance physical money supply and reduce cash shortages, the Reserve Bank of Zimbabwe (RBZ) is issuing larger denomination banknotes for the second time in a year.

Blacks took back their land from around 4,500 white commercial farmers as part of the Land Reform Programme under the late Robert Mugabe in 2000, which resulted in Zimbabwe’s currency crisis.

Major reasons of inflation in Zimbabwe, according to the CFI include a fall in the economy’s output and exports, political corruption, and the acts of former RBZ governor Gideon Gono, who increased the money supply in response to growing debt,

A multi-currency regime was established in Zimbabwe in 2009, when Mugabe’s Zanu PF created a Government of National Unity with opposition party leader late Morgan Tsvangirai. This included the South African rand (ZAR), the Botswana pula, and the US dollar.

According to the Zimbabwe National Statistics Agency, Zimbabwe has one of the world’s highest inflation rates in May 2020, at 785.55 percent.

A member of the RBZ’s Monetary Policy Committee (MPC) who talked to The Africa Report under the guise of anonymity claimed the launch of the Z$100 and Z$200 notes is near, despite the RBZ’s denial.

He said that the current currency has almost no value, making it impossible to deal.

It was determined that Z$50, $100, and $200 notes will be printed by the MPC to correct the situation last year.” The Banks will distribute them if and when they are generated.”

Jee-A van der Linde, an economist at NKC African Economics, feels that the lack of legitimacy of the ZBZ will damage people’s faith in these larger value bills.

More liquidity should ease day-to-day tasks. There’s no way bigger bank denominations can boost trust in the local unit. In fact, logic suggests that it should have the opposite impact, since Zimbabweans will believe that more money is being poured into the system,” says Mr. Mugabe.

Inflation will be limited if the RBZ maintains its current monetary policies, according to the MPC member.

In March 2020, the Reserve Bank of Zimbabwe (RBZ) permitted Zimbabweans to pay for goods and services with foreign money.

Zimbabwe would not utilize multi-currency to stabilize the economy, according to the MPC member.

In local marketplaces, the new local currency is the primary medium of trade. It’s working because the RBZ has permitted the use of USD to bring these resources into the economy,” he added.

Although we are multi-currency countries, we may still utilize foreign currency here as long as it is accepted.” In the long run, we will return to a “mono-currency” economy based on the US dollar.”

There are a number of obstacles connected with the transfer, as was the case with the initial effort in 2009.”

What can be the solution?

Zimbabwe, according to Van der Linde, lacks the foundations to support the Zimbabwean currency.

“Despite what the government claims, Zimbabwe does not have the foundations in place to stably retain its own currency,” he added.

Backing the USD is a possibility, but from a trade viewpoint the USD is too strong as it puts Zimbabwean goods at a disadvantage in comparison to its regional counterparts, he said.

Zimbabweans are familiar with the ZAR, and South Africa is Zimbabwe’s most significant commercial partner, Van der Linde says.

Early on in the 1990s, Mugabe’s administration took a number of sensible steps to tackle Zimbabwe’s increasing financial crisis. However, ZANU-PF was forced to defend itself as protestors and opposition organizations gained a foothold for the first time since the early 1980s.

Mugabe’s administration essentially abandoned logical policymaking in the mid-1990s in favor of nepotism and political prejudice. Leaders in Zimbabwe used this time to push anti-Western propaganda, blaming the World Bank and IMF for the economic collapse. Mugabe and his political supporters continued to exploit the policies of these institutions as a justification for poor performance that was exclusively attributed to internal mismanagement, despite the fact that the institutions themselves admitted to faults.

Whether or not good management could have prevented Zimbabwe’s slide at this point in its economic crisis is arguable, but there is little doubt that the fall was substantially hastened by ZANU-increasingly PF’s dishonest and shortsighted policies

However, the international community has been mostly indifferent to Zimbabwe’s predicament. Human rights breaches in Zimbabwe have been denounced by all three countries, although only minimal economic measures have been imposed. Some members of the ruling class may have been inconvenienced by them, but they have not had a substantial influence on the Zimbabwean political landscape. Robert Mugabe’s remarks decrying Western involvement and sabotage are fueled by every criticism from the United States or England. Although independent media sites have detailed the abuses committed by the ZANU-PF dictatorship, South Africa, which analysts believe has the most influence over Mugabe, has made little to no government criticism of the ZANU-PF administration. When Mugabe’s revolutionary background provides him with political shelter from surrounding countries, such as in this case,

Since then, the US dollar, as well as the South African rand, have been the primary currencies for commerce. Also, a cash scarcity has been progressively choking the economy, which has shrunk to a quarter of what it was in 1999.

If Robert Mugabe is simply replaced by Emmerson Mnangagwa, Western funders will remain skeptical.

As Zimbabwe’s economy is one of the most vulnerable in the world, the International Monetary Fund may be more receptive – but with numerous conditions attached.

It’s possible that China will be the most generous monetary donor in the early days of a Mnangagwa government. As a result of his market reform, Mr Mnangagwa is viewed by some as Zimbabwe’s Deng Xiaoping.

Zimbabwe’s economic progress is held back by corruption, which has been a problem for many years now. Farmland stolen from white farmers ended up in the hands of generals and politicians who had no idea what they were doing.

The fields fell into a state of chaos as a result of this. Similarly, firms that were run by persons who had more political connections than entrepreneurial flair typically failed.

White farmers may be enlisted to help revive Zimbabwe’s commercial farms, say some sources.

Zimbabwe’s economic progress is held back by corruption, which has been a problem for many years now. Farmland stolen from white farmers ended up in the hands of generals and politicians who had no idea what they were doing.

The fields fell into a state of chaos as a result of this. Similarly, firms that were run by persons who had more political connections than entrepreneurial flair typically failed.

Zimbabwe has been in default on $9 billion in international debt for over 20 years. IMF and World Bank help is likely to be required to restructure this debt.

The debt (or at least a portion of it) may be forgiven by a government that does not include Zanu-PF. An IMF contract is considered to be on the table for Mr. Mnangaga, but a unity government with opposition leaders, including former Finance Minister Tendai Biti, would likely have an easier time obtaining fresh finance and renegotiating previous ones.

It’s hard to find formal employment in Zimbabwe. The unemployment rate is greater than 90%. Securing investment and ensuring that money comes in should have a major impact on unemployment within a short period of time.

In addition, the country boasts a wealth of natural resources in agriculture and mining as well as a competent labor force.

Zimbabwe’s unemployment rate may be brought down to a more manageable level with the appropriate political will and economic conditions.

As a result of the deteriorating economic conditions over the previous two decades, three million Zimbabweans are believed to be living outside of the nation now. These people also have talents that might be beneficial in the economic recovery.

As for the financial and political stability of their landing, it will be important for them to feel secure.

In addition, a Zanu-PF-dominated administration might not want them returning this close to an election, if that is the case. It is quite improbable that the great majority of the returning diaspora would vote for Mr Mnangagwa or his party.

Because of the downfall of the Zim dollar, it was required to use the US dollar.

But establishing a sustainable currency involves much more than simply turning on a printing press. Self-belief is essential to success.

It was announced last year that the Reserve Bank will be issuing “bond notes” in order to ease the system’s persistent lack of US dollars.

This was interpreted by many as an attempt to sneak the Zim dollar back into the country through the back door.

Although the notes have not helped alleviate the cash crisis, some observers believe they may have worsened it by increasing the demand for US dollars.

Even if the number of bond notes in circulation is tiny and the denominations are small, few individuals enjoy using them.

Banking became less attractive since cash could only be taken out in tiny amounts and there was always the threat of the Reserve Bank coming for your hard-earned earnings.

Because the army intervened and President Mugabe resigned, the growth in the stock market was halted.