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Authored by Steve H. Hanke of the Johns Hopkins University. Follow
him on Twitter @Steve_Hanke.
In 2008, Zimbabwe suffered the second
most severe episode of hyperinflation in recorded history. The annual
inflation rate peaked in November 2008, reaching 89.7 sextillion (10^23)
percent (see table below).
 
At the peak of Zimbabwe’s hyperinflation episode in November 2008,
Zimbabweans refused to use the Zimbabwe dollar. With that, the economy was
spontaneously, and unofficially, dollarized. Eventually, the government faced
this fait accompli in early 2009, when they dollarized the economy by
accepting the dollar as the unit of account for government finances.
Today, Zimbabwe is once again experiencing hyperinflation, not due to
dollarization, but because the Zimbabwean government is issuing, in effect, a
new currency that is circulating parallel to the U.S. dollar. Currently
(11/1/17), the annual inflation rate is at 333% (see chart below).
During Zimbabwe’s hyperinflation episode from 2007-2008, the Reserve
Bank of Zimbabwe failed to report an accurate measure of inflation rates.
When episodes of hyperinflation occur, the only feasible and reliable way to
measure the inflation rate is via the application of Purchasing Power Parity
(PPP). To do so, data on the exchange rate between the domestic currency and
a stable international currency are required. This was not feasible in
Zimbabwe. The Zimbabwe dollar was not traded on an organized exchange that
reported exchange rates, and the use of black-market exchange rates was not
feasible either.
However, the organized stock market in Harare did provide prices that
allowed for the calculation of implied Zimbabwe dollar exchange rates. One
stock, Old Mutual, was, and still is, listed on both the London Stock
Exchange and the Zimbabwe Stock Exchange. Each share of Old Mutual commands
the same claim on the company’s earnings and assets, irrespective of the
market it is traded on. Therefore, given arbitrage and PPP, the ratio of the
Old Mutual share price in Harare to that in London equaled the Zimbabwe
dollar/sterling exchange rate.
To convert the resulting Zimbabwe dollar/sterling exchange rate to a
Zimbabwe dollar/U.S. dollar rate, I multiplied the Zimbabwe dollar/sterling
rate by the sterling/U.S. dollar rate, creating what is known as the Old
Mutual Implied Rate (OMIR). By using the OMIR as an exchange rate between
Zimbabwe dollars and USD, PPP was then applied as the final link necessary
for calculating inflation rates.
When President Robert Mugabe’s party, ZANU-PF, regained control in
Zimbabwe in 2013, government spending and public debt surged, resulting in
economic instability. To finance its deficits, the government created a “New
Zim dollar.” The New Zim dollar is issued at par to the U.S. dollar, but
trades at a significant discount to the U.S. dollar. As a result of the
issuance of the New Zim dollar, the money supply has exploded in Zimbabwe,
and so has inflation.
Employing the same theory and method of measurement that was used to
calculate Zimbabwe’s 2007-2008 hyperinflation episode, I was once again able
to measure an accurate inflation rate, explained here in
a detailed study. After doing so, I found that Zimbabwe is experiencing
hyperinflation for the second time in less than ten years.
Hyperinflation occurs when the monthly inflation rate reaches 50% per
month and remains above that rate for at least 30 consecutive days. This
initial threshold was breached on September 14, 2017, and the monthly
inflation rate has remained above this rate since. Thus, Zimbabwe is in the
throes of an ignominious hyperinflation, in which the monthly rate of
inflation is 50% (see chart below).
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