Omar Khalid
Zimbabwe has had a turbulent history with its currency, the Zimbabwean dollar (ZWD). Introduced in 1980, the ZWD was initially worth more than the US dollar. However, from 1991 onwards, its value began to significantly erode due to various economic and political factors, including economic liberalisation, government corruption, and involvement in the Second Congo War. By 2007-2008, Zimbabwe was experiencing hyperinflation, with prices doubling approximately every day at its peak. This led to a period of currency instability, with the Reserve Bank of Zimbabwe repeatedly arranging for the printing of new banknotes with higher denominations. During this time, the Reserve Bank of Zimbabwe introduced a surrogate currency in the form of bond notes, also known as plastic money.
| Characteristics | Values |
|---|---|
| Introduction of plastic money in Zimbabwe | Last quarter of 2016 |
| Plastic and electronic money as a percentage of total payments in Zimbabwe | 70% |
| Plastic money technology | Point of Sale (POS) machines |
| Plastic money in rural areas | Need for Rapid Education Programme |
| Plastic money in marginalised communities | Need for a Rapid Education Programme |
| Plastic money in urban areas | Need for more resources towards development of plastic money services |
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What You'll Learn
The Zimbabwean dollar's turbulent history
The history of Zimbabwean currency is a turbulent one, filled with economic crises, hyperinflation, and multiple attempts at currency reform. The country has experienced extreme economic challenges, which have resulted in the Zimbabwean dollar being introduced, discontinued, and reintroduced over the years.
The first Zimbabwean dollar was introduced in 1980, replacing the Rhodesian dollar, which had been the country's currency since 1970. Initially, the Zimbabwean dollar maintained relative stability, but this changed in the early 2000s when the country began to experience severe economic turmoil. This was due to a combination of factors, including political instability, land reform policies, and declining agricultural production, which led to food shortages and a decline in exports. As a result, the Zimbabwean dollar began to devalue rapidly, and the country faced hyperinflation.
By the mid-2000s, the situation had become dire, with the Zimbabwean dollar losing value at an unprecedented rate. Prices of goods were doubling every day, and the country faced severe shortages of basic necessities. In response to this crisis, the government of Zimbabwe introduced a new currency in August 2006, aptly named the ' Zimbabwes dollar'. This new currency was created to replace the old Zimbabwean dollar at a rate of 1,000 old dollars to 1 new dollar. However, this reform failed to address the underlying economic issues, and the new currency also became subject to hyperinflation.
As the country's economic situation continued to deteriorate, the Reserve Bank of Zimbabwe introduced a unique solution in 2008: plastic money. This involved issuing banknotes in the form of plastic or paper, with denominations of up to 100 trillion Zimbabwean dollars. These notes were printed on a polymer substrate, which was more durable and secure than traditional paper notes. The introduction of plastic money was an attempt to address the chronic shortage of physical cash in the country, as the hyperinflation had led to a situation where the value of the currency was so low that it became uneconomical to produce coins and low-denomination notes.
Despite these efforts, the Zimbabwean dollar continued to suffer from hyperinflation, and by the end of 2008, it was essentially worthless. In 2009, the government took the decision to discontinue the Zimbabwean dollar and adopted a multi-currency system, allowing for the use of foreign currencies, primarily the US dollar and the South African rand, as legal tender. This brought much-needed stability to the country's economy and ended the era of hyperinflation.
However, the Zimbabwean dollar made a return in 2019, with the introduction of a new set of banknotes and coins, known as the 'new Zimbabwean dollar'. This was done in an effort to address foreign currency shortages and promote monetary policy autonomy. Nonetheless, the new currency has also faced challenges, including a rapid loss of value and low market confidence, leading to a reintroduction of foreign currencies for domestic transactions in 2020.
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Hyperinflation and its causes
The Zimbabwean dollar, introduced in 1980, was initially more valuable than the US dollar at the official exchange rate. However, this did not reflect the reality of its purchasing power. The value of the dollar began to erode significantly from August 1991 onwards due to the Economic Structural Adjustment Programme (ESAP), a programme of economic liberalisation that caused widespread poverty and unemployment.
The worst of the inflation occurred in 2008, leading to the abandonment of the currency. The peak month of hyperinflation occurred in mid-November 2008 with a rate estimated at 79,600,000,000% per month, with the year-over-year inflation rate reaching an astounding 89.7 sextillion per cent. This resulted in US$1 becoming equivalent to Z$2,621,984,228. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe's hyperinflation because the government stopped filing official inflation statistics.
Hyperinflation is generally characterised by an inflation rate of greater than 50% per month. It rapidly erodes the value of a currency, which leads to economic stagnation, price volatility, and distrust of government monetary policy and authority. It can take a country decades to recover from the economic impacts of hyperinflation, and if monetary policy is not corrected, it can easily reoccur.
The causes of Zimbabwe's hyperinflation crisis were several instances of policy mismanagement by Robert Mugabe's government. In the early 1990s, the president instituted a series of economic reforms that proved disastrous. Poorly structured land reforms caused a sharp decline in food production, which raised food prices even as the banking sector collapsed due to economic sanctions imposed by the US, the IMF, and the EU. The banking sector's inability to mobilise funds for investments and loans was partly due to political looting by societal elites and government officials.
The Mugabe regime also printed vast sums of new currency to finance military action in the Democratic Republic of the Congo and import enough food to reduce the risk of nationwide starvation. The explosion in the volume of currency in circulation caused a rapid increase in prices. The Reserve Bank of Zimbabwe responded to the dwindling value of the dollar by repeatedly arranging the printing of further banknotes, often at great expense from overseas suppliers. By late 2008, inflation had risen so high that automated teller machines for one major bank gave a "data overflow error" and stopped customers' attempts to withdraw money with so many zeros.
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The US dollar as a replacement
The Zimbabwean dollar was introduced in 1980, replacing the Rhodesian dollar at a similar value to the US dollar. However, the value of the Zimbabwean dollar began to erode significantly from August 1991 onwards due to the Economic Structural Adjustment Programme (ESAP), which caused widespread poverty and unemployment. This, combined with impromptu spending to support veterans of the Rhodesian Bush War, resulted in a major currency crash in November 1997.
In the early 21st century, hyperinflation in Zimbabwe further reduced the Zimbabwean dollar's value, making it one of the lowest-valued currency units in the world. The Reserve Bank of Zimbabwe attempted to address this by repeatedly printing new banknotes, but this failed to stabilise the currency. By late 2008, inflation had risen to such extreme levels that automated teller machines for one major bank gave a "data overflow error" and stopped customers' attempts to withdraw cash.
On 13 September 2008, foreign currency was effectively legalised as a de facto currency, reflecting the reality of the dollarisation of the economy. Many shopkeepers refused to accept Zimbabwean dollars, instead requesting US dollars or South African rand. On 29 January 2009, the Zimbabwean government officially legalised the use of foreign currencies, including the US dollar. In response, Zimbabweans quickly abandoned the old Zimbabwean dollar, which was collapsing due to hyperinflation. The use of the Zimbabwean dollar as an official currency was effectively abandoned on 12 April 2009.
Zimbabwe initially adopted a multi-currency system, with currencies such as the US dollar, euro, and South African rand circulating alongside bond coins and notes issued by the Reserve Bank of Zimbabwe. However, the public resisted the bond money as an attempt to reintroduce the Zimbabwean dollar, which had a bad reputation due to hyperinflation. In June 2019, the Zimbabwean government banned the use of foreign currencies in an attempt to end the multi-currency system. This decision faced widespread opposition due to continued public distrust, high inflation, and the need for hard currencies to import goods from abroad.
In March 2020, the onset of the coronavirus pandemic forced the Reserve Bank to reinstate the multi-currency system. Despite these efforts, the Zimbabwean dollar continued to depreciate rapidly. Finally, on 5 April 2024, the Reserve Bank of Zimbabwe announced the introduction of a new currency, the Zimbabwe Gold (ZiG), which would replace the Zimbabwean dollar.
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The government's response to the crisis
The Zimbabwean dollar, introduced in 1980, was initially worth more than the US dollar in the official exchange market. However, its value began to significantly erode in August 1991 due to the Economic Structural Adjustment Programme (ESAP), which caused widespread poverty and unemployment. The government's spending on military involvement in the Second Congo War, under-reported to the International Monetary Fund, also contributed to the country's economic woes.
In response to the declining value of the dollar, the Reserve Bank of Zimbabwe repeatedly arranged the printing of new banknotes, often at great expense from overseas suppliers. This action failed to address the issue, and by late 2008, inflation had skyrocketed. Automated teller machines for a major bank encountered a "data overflow error" and stopped customers' attempts to withdraw money due to the sheer number of zeros.
The government's attempts to curb inflation included declaring inflation illegal and arresting executives of companies that increased prices on their products. These measures were ineffective, and the Zimbabwean dollar continued to devalue, with the official exchange rate in September 2007 at ZW$30,000 to US$1, while the black market exchange rate was estimated at ZW$600,000 to US$1.
In January 2009, the acting Finance Minister, Patrick Chinamasa, acknowledged the reality of the dollarisation of the economy and lifted the restriction on using only Zimbabwean dollars. This allowed citizens to conduct business using foreign currencies such as the US dollar, euro, and South African rand. However, civil servants and teachers were still paid in Zimbabwean dollars, and their salaries amounted to around US$1 per month.
The government also attempted to limit the amount of money in circulation by restricting bank withdrawals. Additionally, in 2008, the Reserve Bank of Zimbabwe redenominated the currency and introduced new coins and banknotes. Despite these efforts, the Zimbabwean dollar continued to suffer from hyperinflation, and its use as an official currency was effectively abandoned in April 2009.
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The future of Zimbabwe's currency
Zimbabwe has long struggled with hyperinflation, which has caused the Zimbabwean dollar to lose its value. The government abandoned the currency in 2009, and since then, the US dollar and other foreign currencies have been widely used throughout the economy. In 2015, the government demonetized the Zimbabwean currency entirely and set a goal of formally adopting the US dollar as the country's currency. This led to a remarkable economic turnaround, with inflation averaging only 2.1% between 2010 and 2018, and GDP per capita increasing at a 5.4% average annual rate.
However, in 2019, the Zimbabwean government reintroduced the Zimbabwean dollar and prohibited the use of foreign currencies as legal tender. Inflation quickly returned, averaging 354% annually between 2019 and 2023. In 2024, Zimbabwe introduced a new currency called the ZiG (short for Zimbabwean Gold), which is backed by gold and intended to mitigate the country's currency instability and hyperinflation. The ZiG will circulate alongside other foreign currencies in the economy. However, there is skepticism about the ZiG's ability to gain the confidence of consumers and become a stable local currency. The currency has already lost almost 80% of its value on the black market, and locals have been reluctant to embrace it.
To improve the chances of success for the ZiG, the Zimbabwean government needs to address the lack of confidence in the new currency. This can be done by demonstrating monetary stability and ensuring a consistent supply of foreign currency in the market. Additionally, the government should consider the concerns of businesses and individuals who are reluctant to use the ZiG due to its instability. Increasing the use of the ZiG for tax payments and other official transactions could also encourage wider adoption. Furthermore, the government should focus on economic policies that promote growth and stability, reducing the impact of global economic shocks and avoiding miscalculations that led to hyperinflation in the past.
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Frequently asked questions
Plastic money was introduced in Zimbabwe in the last quarter of 2016.
The Reserve Bank of Zimbabwe introduced a “surrogate” currency in the form of bond notes under the $250 million AfreximBank facility.
Plastic money was introduced to stimulate exports through an Export Incentive Scheme, with the goal of encouraging gold and tobacco production.
In 2017, the RBZ announced that plastic and electronic money accounted for 70% of payments in Zimbabwe.
