Zimbabwe has captured global attention due to its serious economic struggles. Pre-independence, Zimbabwe’s economy relied heavily on agriculture and the stable Rhodesian Dollar. However, post-independence, it has encountered the challenges of hyperinflation, land reform, and political instability. These difficulties have had a long-lasting impact on Zimbabwe’s economy, making it difficult for locals to trust the local currency, and has piqued the interest of the global community. The pressing question remains: Can Zimbabwe overcome these obstacles and find its way to economic recovery?
Historical Background (Pre – Independence)
Before gaining independence in 1980, Zimbabwe was a British colony, known as Rhodesia. The transition to self-governance was a pivotal moment in the nation’s history, accompanied by numerous challenges, such as corruption. In the pre-independence period, Zimbabwe was known as the “breadbasket of Africa” owing to its abundant production of maize, tobacco, and cotton. However, this emphasis on cash crops came at a price, creating an over-reliance on these commodities that made Zimbabwe susceptible to economic shocks. Beyond this, Zimbabwe faced a deeply troubling reality, approximately five million black people were ruled over by 225,000 white settlers who maintained control through repression and, in some extreme cases, murder. Indigenous labourers experienced low wages, forced labour, and as a result, extreme poverty. The colonial administration also prioritised infrastructure development to primarily serve their own interests, which severely limited indigenous communities’ access to essential infrastructure. This, in turn, resulted in high mortality rates and a lack of access to education, hindering the development of Zimbabwe. This is a key factor for its issues with governance. When Britain left, it gave rise to a government in pursuit of filling their pockets, rather than public wellbeing.
Recognising Zimbabwe’s transition from colonial rule to independence is important in understanding the nation’s current challenges. These historical injustices have left a negative impact on Zimbabwe’s society, politics, and economy, resulting in an extremely unstable currency.
The beginning of the end
After gaining independence, Zimbabwe initially appeared to be on the path to success, experiencing significant economic growth with an average GDP increase of 5.5% from 1980-1990. This growth was primarily driven by increased demand in the economy, caused by redistributive fiscal policies, using taxes and government spending to address income inequality, and the opening of external markets. Until 1990, economic growth was characterised by healthy boom and bust cycles.
However, by 1990, signs of economic weakness began to show, mainly due to policy mismanagement by the former Zimbabwean Prime Minister Robert Mugabe. From 2000 – 2008, a lot of issues arose, such as: low investment, decreased productivity, due to foreign exchange shortages, and a decline in economic activity. This resulted in a 50% decrease in real GDP growth, gross domestic product adjusted for inflation. These factors can be attributed to poor governance, with economic mismanagement and extreme corruption taking place.
The banking sector also collapsed due to economic sanctions, such as trade restrictions, by the US, EU, and IMF. These sanctions were imposed to combat embezzlement and fraud by elites and government officials, including electoral rigging. The inflation rate during this collapse increased significantly, and in 2007, it escalated to severe hyperinflation, peaking at 500 billion percent in 2008.This hyperinflation was the result of an excessive amount of money in circulation, created to finance public expenditures and military action in DRC. Increased food imports also added to this growing debt. To counter the falling value of the Zimbabwean dollar, more money was printed. As a result of this reduced economic performance, poverty rates increased rapidly, and real income per capita fell massively from $644 in 1990 to $433 in 2006. The poverty rate also rose from 42% in 1995 to 63% in 2003, with unemployment rates as high as 80% during this time. Along with this, the black market for foreign currencies became so popular, that government officials began participating in this exchange, further emphasising corruption.
This was one of the worst cases of hyperinflation in history, to the extent that at in 2008, they were printing a 100 trillion Zimbabwean dollar, which was equivalent to just 40 US cents.
The supposed turning points
In 2008, Zimbabwe took a significant step by adopting foreign currencies to stabilise prices, exchange rates, and rebuild consumer confidence. The following year, the government completely abandoned printing Zimbabwean dollars. This move successfully addressed the confidence issues associated with the currency, and Zimbabwe mostly used the US dollar. As a result, hyper-inflationary pressures eased, and the inflation rate steadily declined, reaching 4.3% by July 2018.
In 2014, the Reserve Bank of Zimbabwe introduced ‘convertible’ coins in denominations ranging from $0.01 to $0.50, known as Zimbabwean bond coins. This was to combat retailers rounding prices to the nearest dollar due to the absence of local coins. The central bank assured that this initiative didn’t signify the intent to bring back a national currency.
However, by 2016, the liquidity of the US Dollar had significantly decreased, and the bank’s governor, John Mangduya, announced that Zimbabwe would issue a new bond note level to the American dollar. Although, many feared that this move could repeat the errors of 2008, and they were right.
The return of the Zimbabwean Dollar
In June 2019, the government reintroduced the local currency, but it quickly depreciated again, with the official inflation rate reaching 97.9%, and the central bank being ordered to stop lending immediately. Despite efforts to restore confidence, it has weakened by over 80% just this year. According to ‘Trading Economics’, the annual inflation rate soared to 540% in February 2020 and further to 676% in March 2020, although the effects of COVID-19 must be accounted for. Additionally, economists reported that almost 80% of local transactions this year were in US Dollars, surpassing the local currency for the first time, following its previous outlaw in local transactions. The Zimbabwean dollar was intended to revive the stagnating economy but appears to have caused severe damage.
A 35-year-old father of two said, “I went into the supermarket to buy bread and other groceries items, but I was shocked to see that prices had gone up. It is like we are back in 2008,”. This just shows how the pressures of the past are returning and affecting Zimbabweans. In June 2023, a loaf of bread costed 10,000 Zimdollars and a week before, it costed no more than 2000 Zimdollars. As the Zimdollar continues to weaken, citizens call for re-dollarisation, although Mangduya (Governor of the Reserve Bank of Zimbabwe) stated, “This is not the end of the Zimdollar. This country has no capacity to fully dollarise. It is not sustainable”.
As of now, $1 is equivalent 322 Zimdollars.
Hope for the future
General elections were held throughout Zimbabwe on the 23rd and 24th of August 2023 to elect the president, legislators, and councillors. Emmerson Mnangagwa was re-elected and appealed for unity while promising to revive the economy. Zimbabwe possesses a wealth of human capital and abundant mineral and natural resources, which, if managed effectively, can support the country’s development.
Recently, a gold-backed digital currency has been implemented, due to Zimbabwe’s huge access to gold, and will be used as a legal tender and store of value alongside the Zimdollar and bond notes. Users can buy and sell it using Zimdollars and other foreign currencies. This is a strategic move to stabilise the country’s local unit against the US dollar.
The future of Zimbabwe shows promise, but it is imperative that Zimbabwe stabilises its economy to restore confidence in the local currency.
etonomics.com 