Zimbabwean Currency Weakens, Fueling Fears of Worse Inflation

The $100 trillion bill is an example of the massive denominations of Zimbabwean currency that were required to buy everyday goods during the last major inflationary period. (Wikimedia Commons)

The value of the Zimbabwean dollar has collapsed in foreign and domestic exchange markets over the past several weeks, leading to a massive decrease in consumer confidence. Recent reports from the International Monetary Fund (IMF) calculated Zimbabwe’s inflation rate in August to be as high as 300 percent, with the currency losing much of its value against the dollar on official exchanges. The black market valuation of the currency also fell from $10 Zimdollars to $1 U.S. dollar (USD) on September 7 to $20 Zimdollars to $1 USD by September 20. 

The drop in the black market valuation of the currency is considered to be more accurate than the official exchange rate, which is often improperly influenced by Zimbabwe’s government. Although the currency collapsed several weeks ago, the inflation issues seem to have continued from August into September. 

Currency issues are not a new concern for Zimbabwe. Commentators argued that Zimbabwe was in a “currency crisis” as far back as January. Furthermore, as recently as 2008 and 2009, the government was forced to abandon two separate currencies in the course of just a few years. In 2008, as the rest of the world grappled with the financial crisis, Zimbabwe faced a humanitarian disaster as basic government services in the nation collapsed.

Two years earlier in 2006, then-President Robert Mugabe had taken the nation off the Zimbabwean dollar, replacing it with the “bearer check.” He hoped the move would help stabilize the nation’s finances, which had been ravaged by short sighted and corrupt economic planning.     

This move proved to be disastrous, however, and inflation reached 500 billion percent in December 2008. Sanitation services failed across the nation, leading to a cholera epidemic. Although inflation is still nowhere near the levels seen in 2008, experts are concerned. 

These concerns have been borne-out by troubling government actions, such as the freezing of accounts owned by prominent Zimbabwean companies in an effort to stop them from transferring their Zimdollars to more stable foreign currencies.

Many believe the new currency uncertainty is due to a continuation of poor monetary policy from the early 2000s. The nation’s political leaders have proved willing in the past to print currency to finance government policies and to buy support from valuable constituencies. Economists like Harare based Victor Bhoroma have long held that this lack of concern for the size of the money supply has led to the country’s issues with inflation.

It is currently unclear whether the Zimdollar will be able to recover. Regardless, in the short term, consumer confidence in the currency has been decimated, and many businesses have transitioned to using USD amid the turmoil. A massive government effort will be required to regain the confidence of both everyday citizens and the business community at large.