Financial History: Zimbabwe Economic Collapse 2000-2008

For political motives in 2000 the Zimbabwean government started the destruction of the commercial farming sector. In a country where most of its exports came from farming and agriculture this caused a disastrous impact to the Zimbabwean economy.

After the destruction of the farming sector the GDP of Zimbabwe quickly began to tumble from 6.86B USD in 2000 to 4.42B USD in 2008. Exports massively declined and Zimbabwe recorded a trade deficit for ever year after the destruction of the commercial farming sector. This happened because Zimbabwe's exports where mostly agricultural or farming based in fact its biggest before the destruction was Tobacco. The graphs below show the balance of trade for Zimbabwe between 2000 to 2008 and also the GDP from the year 2000 to 2008.

These problems with trade also started to impact the people of Zimbabwe. As the GDP started to decline also did the GDP per capita, in 2004 the GDP per capita was 406 USD and in 2008 it had fallen to just 280 USD. As I stated previously exports also started to massively decline and Zimbabwe reported a trade deficit for every year between 2001 and 2008.

However the worst problem was the Hyperinflation. In order to fund this massive deficit the Zimbabwean government had to borrow massive amounts of money from the bond markets. In fact the Zimbabwe government borrowed so much that in 2008 the country's debt was equal to 131% of its GDP. The graph below shows how much the country's debt to GDP increase from 2000 to 2008.

After all of this borrowing Zimbabwe's creditors eventually started to come calling. However Zimbabwe didn’t have the necessary capital to pay back this huge amount of money they borrowed. They couldn’t borrow more money as it would only add to the pool of debt and they also couldn’t raise the money from tax revenues as their economy was contracting. The only thing they could do is print the money and that’s what they did.

However what they might not have realised is that with every note they print their currency was worth less as the currency began to depreciate. This had disastrous effects to Zimbabwean economy has it eroded the little savings which its citizens had and also it caused prices of basic goods such as bread to go sky high.

This excessive increase in the money supply caused massive Hyper inflation. In 2008 the inflation rate spiked hitting a high of 66,212 percent. The prices of basic goods increased daily, in 2004 the price of a loaf of bread was Z$35,000 and by 2006 the price had risen to Z$80,000. The graph below shows the inflation rate of Zimbabwe from 2000 to present day.

  

Due to the devaluing currency the Zimbabwe government also had to print larger and larger notes to accommodate for the devaluation.  The biggest note they printed was the bearer cheque which was Z$ 50,000 which wasn’t even enough to purchase a loaf of bread. In fact the bearer check was also only worth 49 US cents.

These economic problems also had large impacts to the people of Zimbabwe. They stopped using banks, they stopped paying they taxes and they also stopped using the national currency as a form of trading.

This harsh economic environment lasted until 2009 when the Zimbabwean government declared bankruptcy and adopted the US currency as a means of Exchange.

Thankfully after this the Zimbabwean economy started to rebuild itself and the GDP has started to increase ever since this change (see graph).

 

This Article has shown how quickly an economy can collapse and how printing excessive amounts of money can destroy a currency. It is important that future and present governments take note of this economic disaster as it could very well happen again if the wrong decisions are made.

Daniel Butler

Sources: Trading Economics, http://www.thezimbabwean.co/comment/opinion/64699/the-economic-collapse-of-zimbabwe.html, http://www.cato.org/sites/cato.org/files/pubs/pdf/dpa5.pdf