Will ZIG end hyperinflation in Zimbabwe?

The world is increasingly swinging towards authoritarian governments hoping for brighter days — but they will most likely slip into darker nights

On April 30, the Internet was flooded with pictures and stories of Zimbabweans holding their new currency, named ZIG (short for Zimbabwe Gold). The Zimbabwean economy has faced hyperinflation for nearly two decades now, and has struggled to find a solution to end the crisis.

The introduction of ZIG is yet another attempt to end the inflation crisis.

It is important to focus on this development as it shows how authoritarian politics eventually brings doom to the citizens. The world is increasingly swinging towards authoritarian governments hoping for brighter days — but in reality, they will most likely slip into darker nights.

Zimbabwe attained independence from the British in 1980. The country has been ruled for most of its independent history by one person: Robert Mugabe. Mugabe was Prime Minister from 1980 to 1987, and President from 1987 to 2017, before passing away in 2019.

There is a common theme behind all such economies run by oppressive rulers. They come to power based on their immense popularity amidst promises to reform the country. Initially, there are few reform measures, but soon they are forgotten amidst the euphoria. Eventually, one is hit by the reality of the weak economy. Amidst the lack of options, the governments simply resort to spending by increasing the supply of money. One of the core principles of economics is that if the supply of money rises without any real growth, inflation will skyrocket.

The table below shows that what happened in Zimbabwe is no different. From the 1980s to the 2000s, the growth rate declined whereas inflation touched stratospheric levels. The average inflation in the 2000-2007 period was 1.85X10⁷ per cent (or 1.850 billion per cent)! Much of this rise was because of inflation in 2007 being 1.47X10⁸ per cent. The number of zeroes in Zimbabwe’s inflation figure stopped making any sense! Economists define monthly inflation above 50 per cent as hyperinflation. Zimbabwe’s inflation numbers are way beyond that number.

Ironically, even these insane inflation numbers were seen as low by economists. There is constant criticism that Harare was hiding the true inflation numbers. Economist Stephen Hanke, an expert on computing actual inflation levels of such regimes, put Zimbabwe’s annual inflation in 2008 at 7.96X10¹⁰ per cent with prices doubling every 24 hours. Hanke ranked Zimbabwe’s hyperinflation as the second worst in history.

Two steps, little success

How do governments fight hyperinflation?

First, they ignore the problem and keep introducing currencies of higher denominations. Zimbabwe introduced a 100 trillion Zimbabwe dollar note becoming the largest denomination currency ever introduced anywhere in the world.

Second, they introduce a redenominated currency (new or old) without the zeroes, convert the existing balances into a new currency, and over time inflation is controlled. For instance, Germany introduced the Rentenmark in 1923 to end its hyperinflation. Another parallel approach is to adopt a stable global currency which also does the same work.

Harare did both: it redenominated the existing currency and allowed multiple foreign currencies. In the period from 2006 to 2009, the central bank did three rounds of redenomination but none worked. The government allowed multiple foreign currencies to circulate, such as the South African Rand, the Botswana Pula, and the US Dollar. Eventually, the US Dollar became the principal currency.

Episode 58

Just introducing a redenominated currency or a global currency system is not enough. The government must follow it with reforms of managing growth by actual reforms and not printing money. Unfortunately, Harare refused to learn the lessons despite the huge economic tragedy.

Inflation came down from 2010 to 2016, but started to rise after 2017. With rising dollarisation, Harare was keen to have its currency. In 2019, the government introduced a new Zimbabwean Dollar (ZWL$). With no reforms accompanying this move, it led to hyperinflation in 2019 and 2020.

Hanke in a new research paper noted that Zimbabwe hyperinflated again becoming the 58th hyperinflation episode in history.

Gold glitters

Amidst the continued chaos and currency failures, Zimbabwe’s central bank decided to start issuing gold to maintain store of value. In 2022, it started issuing gold coins. The 22-carat gold coin had liquid status, was easily convertible to cash, and could be used for transactional purposes. The coin could be used as collateral for loans. The banks started publishing the price of the gold coin daily to enable liquidity of the coin.

In 2023, the central bank issued gold-backed digital tokens to complement the physical gold coins. The digital tokens were fully backed by the physical gold coins and their purpose was to expand the access and usage of these tokens by the public. By March 2024, the central bank had sold 44 traches of digital tokens that amounted to around 917 kilograms of gold.

Seeing the public response to gold, the bank took a step further and introduced the ZIG (Zimbabwe Gold). This will be ‘pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets (potentially including gold)’.

Zimbabwe has faced quite an inflationary ride over the last two decades. All these inflationary rides start with political/autocratic leaders deciding to print money to boost growth. Will Zimbabwe’s history take a different course with ZIG?

(Amol Agrawal is an economist teaching at Ahmedabad University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.