When more is not good: A comparative analysis of Zimbabwean hyperinflation

By  Siddharth Shukla


One of the most severe hyperinflation situations in the history of the world was that of Zimbabwe. At its peak, the annual inflation rate was as high as 89.7 sextillions. Zimbabwe, a nation in southern Africa, has faced one of the gravest economic crises in history. This case of hyperinflation was a result of several factors like land reform, price control, corruption and politics. Though the condition of hyperinflation is not unique, it becomes eminent to study this situation to avoid such a condition in the future. Through my paper, I will depict that not all aspects of hyperinflation were limited to Zimbabwe, as these have happened in different parts of the world at different points in time. I will analyse the factors that led to hyperinflation as well as show some conditions that were common in other countries that have faced this situation before. I will start by explaining the concept of hyperinflation along with the “Quantity Theory of Money” followed by the factors that affected the Zimbabwean economy and Analysis.

Inflation is the situation in which the general price level of the goods and services rise. As a result, fewer goods and services are now available with a unit currency or medium of exchange. This also results in the reduction of purchasing power of the buyer. It is measured by the inflation rate, which is defined as the rate at which the prices of the goods and services rise over time. If such a situation persists for long, it might result in hyperinflation. Hyperinflation can be defined as a situation when the annual inflation rate of an economy is higher than a hundred percent. Hyperinflation generally culminates into a worthless currency. 

The quantity theory of money can be used to depict the situation of inflation. According to the quantity theory of money, MV=PY, where M is the money supply, V is the velocity of money, P is price level and Y is the output. Now, imagine a situation where the economy is growing slowly. The central bank will increase the money supply to cope with the stagnant economy.  People might expect inflation in future and start investing in non-inflatory assets like real estate as quickly as possible. Hence, the velocity of money also increases. The situation for inflation can be depicted as MV↑=PY,

Here, Y means that output is stagnant. When money supply, price level and velocity of money increases but the output remains constant then it results in inflation. If the rate of inflation is greater than 100 percent annually then it is hyperinflation. In Zimbabwe too, the government increased the money supply and as explained above, a similar situation was created. Now, I will be discussing the factors that led to hyperinflation.  

Political Factors:

In 1997, around 60,000 war veterans were paid around 50,000 ZWD along with a monthly pension of 125 ZWD per month. This constituted of 3% GDP of the nation, inflating the budget deficit by 55% in 1997 in relation to 1996 levels. This destabilized the economy and considering the deteriorating situation, the World Bank temporarily withdrew USD 62.5 million line of credit until the government ensured that the inflation rate won’t cross 8.9(projected) budget deficits. 

One of the reasons for Hyperinflation in Zimbabwe is the involvement of Zimbabwe in the Congo Civil War. The government sent troops to help the Democratic Republic of Congo to back Kabila under SADC protocol. Even though there was an economic downturn since the 1980’s, Robert Mugabe had invested million dollars per month on the civil war. There was no geopolitical benefit to the nation as these nations do not even share the same territorial boundary. According to London Financial Times, the government had allegedly spent over $166 million between January and June. 

Similarly, involvement in the First World War by Germany was detrimental to the nation as after the war ended, it was forced to pay 32 Billion US Dollars as reparations under the treaty of Versailles apart from the war expenses. These war reparations and war expenses led to a decrease in the value of the national German currency. As a result, the currency was reduced to 1 million millionths of its original value.

International Sanctions:

With the fall in agricultural output, the country was not able to fulfil the debt obligations of the World Bank. As a result, the World Bank in October 2000 stopped any further lending to Zimbabwe due to non-payment of debts for six months. With the increasing instances of human rights violations in the country, the European Union imposed economic sanctions over the country. It suspended all the support to the Zimbabwean government except for those projects that were benefitting the population. In addition to this, International Monetary Fund(I.M.F.) debarred any financial assistance to the nation because of the pending debt which was over US$ 132 million. 

Bolivia, a South American nation, during the 1980s lost access to foreign capital markets and IMF stopped lending money in the following year. In 1970’s Bolivia used the foreign borrowings to cover up its fiscal deficits. This exhausted international financing led to the foreign exchange crisis and devaluation of the Bolivian peso leading to inflation because of the increasing import costs. Consequently, the government was forced to print money to finance the deficit. 


Price Control and Land Reform

Another decision by the Mugabe government that further worsened the situation was the land reformation program started in November 1997. Under this program, all the land previously owned by the white farmers was to be redistributed. But this decision was taken without any economic consideration. Consequently, the agricultural output fell. In particular example of Tobacco, agricultural output fell from 18% of GDP in 2000 to 14 % in 2002. Unfortunately, it adversely impacted the market as the Zimbabwean dollar dwindled, lost 75 % of its value to US dollars. Stock markets plunged by 46 % from the peak levels in the same month. The Central bank increased the interest rates by 6 percent to control the situation. Subsequently, exchange rates continued to decline. Due to this decline in the foreign exchange rates, the prices of the consumer goods increased by 25 percent coupled with the fall in real wages.  With the pressure from trade unions, the government was forced to introduce price control over goods. These price control did more harm than good as it led to a shortage of essential commodities in the official market, fuelling the informalization of the markets. When the government introduced price control to tackle the inflation, citizens of the nation were faced with two choices either to follow the regulation or to disobey the price control in order to gain the profit which would otherwise be lost. Owing to the rampant corruption, chaos and mismanagement within the country, it was not inevitable that the commoners chose to breach the price controls paving the way for hyperinflation.

Similarly, the French government tried to control hyperinflation using price and exchange control. In 1793, stringent laws known as “The Law of the Maximum”. The control was enforced with the use of merciless guillotine, sale above the price ceiling did not take place but the government failed to facilitate the sale of grains (Coomer, Jayson, and Thomas Gstraunthaler).


Corruption continued in both the private and public sector. One of the major scandals was that of United Merchant Bank of Zimbabwe Ltd. In this case, the bank was issued a licence in 1995 but it was declared insolvent in 1997 as it fraudulently sold ZWD 1,263 million government bonds to other commercial banks and transferred the money offshore. The central bank intervened here as a substantial number of nation’s commercial banks were in financial crisis further adding to inflation. Reserve bank of Zimbabwe made loans at negative real rates of interests to the exporters at subsidised rates. This move forced the commercial banks to lend money at negative interest rates. The class of people benefitting from these loans were reluctant to support anything that will ameliorate the economy’s condition as they were being benefitted from the hyperinflation.

This scene is not unique in history as it had happened in Germany. During the 1920’s crises, the inflation was supported by the industrialist class. The agriculturalists also supported mark’s depreciation as their mortgage burden abated because of inflationary erosion. It was the people from these classes that prolonged the hyperinflation as they resisted any policy that will stabilise the exchange rate. They supported such fiscal and monetary policies that will further slow the and sabotage the chances of recovery during the Hyperinflation.

Aftermath and steps taken or should be taken:

Finally, with no hopes of recovery, Zimbabwe abandoned its currency and adopted US Dollars as their primary medium of exchange. This helped in the recovery of the economy as it led to a 40 % rebound in incomes of the citizens. the economy has become solely dependent on the inflows of dollars and without any local medium of exchange, it is difficult to have control monetary policy. In 2016, Government introduced “bond notes” to introduce liquidity. Though it was backed by hard currency, it deteriorated in value. In 2013, the government issued a new currency known as the New Zimbabwean Dollar that is traded at par with US Dollar but with substantial discount rate to it. As a result, the money supply plummeted in Zimbabwean economy and inflation is on the rise. Economic stability hampered also because the government spending increased.

Currently, according to Tony Hawkins, an economist from the University of Zimbabwe, the inflation rate is on the rise and it is growing more than 40 percent. Mutasa Dzinotizei, head of Zimstats statistics agency said that the prices of the imported goods have increased from 30 to 150 percent in the months of August and September 2017.


State government should have been careful while considering the allowance of the military veteran as it was an investment without returns, in other words, the money spent was not profitable.  Land reform became politicised and it was a huge blow to the nation’s economy. New owners were not able to finance the commercial crops, as a result, the export of such crops was adversely affected, depleting the nation’s income from trade. The land reform was not at all efficient as it involved high opportunity cost for the government as the foreign investment decreased because of this move. Funding and involvement in Congo civil was a bad move for the nation’s suffering economy. It did more harm than good as the government utilized all the monetary funds for the public in the war. Overdependence on the international capital made the country vulnerable to the economic instability. Enforcement of price control was not effective as the denizens did not follow it which paved way for Hyperinflation. Price control should have been governed by stringent laws for the implementation. Execution of the policies properly might have helped in ameliorating the stagnant economy. The government should have supported and created opportunities for more foreign investments as it would have helped the economy with the creation of many job opportunities. Government spending should have been limited and not exceed the fiscal deficit at least until the time of recovery. Almost all factors were not exceptional they had been experienced earlier by other economies. Zimbabwe’s government should have referred to the hyperinflation situations in other countries for better tackling the problem.  


Finally, as aforementioned, I have been able to showcase that the factors that abetted the hyperinflation in the Zimbabwean economy were not unique. These devastating conditions were suffered by other nations at some point or the other. The involvement in the Congo civil war was not a fruitful idea for Zimbabwe. International funds dried up and the nation was not able to pay off the previous debts which further led to the international sanctions isolating the nation from getting any foreign aid. Land reform may have been started for a good cause, but it was a huge failure as it reduced the exports of the nation as well as it affected the foreign investments. Corruption during the early phase of the economic downturn was another major factor that contributed to hyperinflation. The country though changed its official currency, it is still struggling with the increasing inflation rate.


  1. Kairiza, Terrence. “Unbundling Zimbabwe’s Journey to Hyperinflation and Official Dollarization.” GRIPS Policy Information Center, www3.grips.ac.jp/~pinc/data/09-12.pdf accessed 29 April 2018.
  2. Coomer, Jayson, and Thomas Gstraunthaler. “The Hyperinflation in Zimbabwe.” The Quarterly Journal of Austrian Economics, vol. 14, ser. 3, pp. 311–346. 3, mises.org/library/hyperinflation-zimbabwe.
  3. Hawkins, Tony. “How Zimbabwe’s Economy Was Brought to the Brink of Collapse.” Financial Times, Financial Times, 19 Nov. 2017, accessed 30 April 2018, www.ft.com/content/5fe10fea-cd13-11e7-b781-794ce08b24dc.
  4. “Africa | Mugabe’s Costly Congo Venture.” BBC News, BBC, 25 July 2000, accessed on 28 April 2018, news.bbc.co.uk/2/hi/africa/611898.stm.
  5. “Hyperinflation Threat Returns to Zimbabwe.” Reuters, Thomson Reuters, 27 Oct. 2017, accessed 30 April 2018, www.reuters.com/article/zimbabwe-inflation/hyperinflation-threat-returns-to-zimbabwe-idUSL8N1N22JU.
  6. Hanke, Steve. “Zimbabwe Hyperinflates Again, Entering the Record Books For A Second Time In Less Than A Decade.” Forbes, Forbes Magazine, 29 Oct. 2017, accessed 1 May 2018, www.forbes.com/sites/stevehanke/2017/10/28/zimbabwe-hyperinflates-again-entering-the-record-books-for-a-second-time-in-less-than-a-decade/#3dc7bed43eed.
  7. Goodwin, Neva R., et al. Principles of Economics in Context. M.E. Sharpe, 2014.
  8. Safeca, Alcides. “The Economic Impact of WWI on Germany.” The Economic Impact of WWI on Germany, 30 Nov. 2011, accessed on 1 May 2018, impactofwwi.blogspot.in/

 Siddharth Shukla, the author, is a third-year law student of the BA.LLB program at Jindal Global Law School.

Featured Image Source: African Examiner

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