Zimbabwe’s Monetary Policy: Lessons for Other African Nations

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Zimbabwe’s economic crisis reached a nadir in the late 2000s, characterized by one of the world’s severest hyperinflations. At its peak, prices doubled every 24 hours, rendering the Zimbabwean dollar virtually worthless. Citizens experienced extreme hardship, with necessities becoming prohibitively expensive.

In 2008, the Zimbabwean dollar faced extreme devaluation, with a single US dollar exchanged for ZWD2.6 trillion. According to the Zimbabwe National Statistics Agency, the nation’s inflation reached 35 percent in January, rising from 27 percent in December 2023.

The infamous anecdote of purchasing a loaf of bread for millions of Zimbabwean dollars became emblematic of the country’s economic collapse. Families struggled to afford essential items, and savings evaporated overnight.

In response to the crisis, Zimbabwe abandoned its currency and adopted a multi-currency system, predominantly relying on the US dollar and South African rand. This move brought temporary stability, but it also highlighted the country’s loss of monetary sovereignty and exposed vulnerabilities to external shocks.

Fast forward to the present, Zimbabwe has reintroduced its national currency, the Zimbabwean dollar, in an effort to regain control over monetary policy and restore confidence in the financial system. However, the road to stability has been fraught with challenges. Initial reintroduction efforts were met with skepticism, as memories of hyperinflation and currency devaluation lingered. The new currency faced immediate pressures, with inflationary spikes and exchange rate volatility eroding purchasing power.

The Nigerian naira defied the recent surge of the dollar in 2024, maintaining its upward momentum amidst concerns over persistent inflation. Reaching a four-month peak of N1,120 per dollar on the black market, the naira’s strength was fueled by increased activity in Nigeria’s money market, a result of the Central Bank of Nigeria’s (CBN) FX reforms injecting liquidity.

Nigeria’s National Bureau of Statistics reported a rise in inflation to 29.90 percent in January 2024 from 28.92 percent in December 2023. The surge in inflation has led to a significant increase in food prices, prompting protests across Nigeria.

Former Nigerian President Olusegun Obasanjo urged President Bola Tinubu’s administration to draw lessons from Zimbabwe’s economic challenges amidst Nigeria’s worsening economic hardship.

Obasanjo drew parallels between Nigeria’s escalating inflation and economic downturn with Zimbabwe’s recent experiences. He emphasized the need for Nigeria to seek insights from Zimbabwe’s strategies, even if the approach would differ.

While acknowledging that the surge in the cost of living predates Tinubu’s administration, Obasanjo noted that it worsened after he assumed office. Tinubu’s government’s decision to remove fuel subsidies and float the naira contributed to the escalating economic challenges. T

The removal of fuel subsidies resulted in a surge in petrol prices from N145 to N630, subsequently impacting food prices. Additionally, the depreciation of the naira against the dollar has exacerbated the situation, with the exchange rate surpassing N1,600 against the dollar.

Comparatively, throughout 2022, the Ghanaian cedi depreciated sharply against major currencies, especially the U.S. dollar. This decline, exceeding 55% between January and October, posed significant challenges for Ghanaian importers, who struggled to finance shipments and clear goods at ports due to increased costs. Access to foreign exchange became increasingly restricted, delaying trade as the Bank of Ghana managed forex distribution tightly.

The depreciation of the cedi also fueled high inflation rates, reaching 40.4% year-on-year in October 2022, primarily driven by surging food and fuel prices. This inflation eroded consumer purchasing power, leading to reduced demand for goods and services. Despite projections indicating a slower depreciation rate for the cedi against the dollar, concerns lingered over its impact on the economy’s stability.

In 2021, the Governor of the Central Bank of Sierra Leone, Prof. Kaifala Kallon, announced plans to Redenominate the country’s legal tender, the Leone, by removing the three last zeros from the face value of the currency.

Despite these setbacks, Zimbabwe has made strides towards economic recovery. Efforts to stabilize the currency and implement structural reforms are gradually bearing fruit. Inflation rates have moderated, and the exchange rate has shown signs of stabilization. The government has embarked on initiatives to attract foreign investment, promote export diversification, and improve fiscal discipline.

Zimbabwe replaced its collapsing local currency with a new one backed by gold and foreign currencies in hopes of stability and reducing inflation. The country relaunched its own currency in 2019 after a decade of dollarization, but it struggled to gain public trust, with over 80% of transactions now in foreign currency.

A more than 70% decline in the Zimbabwean dollar since the year’s start drove inflation past 55% annually in March, evoking memories of hyperinflation under former leader Robert Mugabe. The new currency, Zimbabwe Gold (ZiG), circulates alongside foreign currencies, with the central bank setting a 20% interest rate, drastically lower than the previous 130%.

Lessons Learned from Zimbabwe’s Monetary Policy

Zimbabwe’s economic woes were exacerbated by reckless fiscal policies, including excessive government spending and unsustainable debt accumulation. Other African nations must prioritize fiscal discipline, ensuring that government expenditures are sustainable and aligned with revenue generation. Sound fiscal management lays the foundation for a stable economic environment and mitigates the risk of currency devaluation.

The erosion of central bank independence in Zimbabwe undermined the credibility of monetary policy, leading to unchecked money printing and hyperinflation. African nations must safeguard the independence of their central banks, shielding them from political interference and ensuring that monetary policy decisions are based on economic fundamentals rather than short-term political considerations. A credible and transparent monetary policy framework is essential for maintaining price stability and fostering investor confidence.

Zimbabwe’s overreliance on a single commodity, namely agriculture, left its economy vulnerable to external shocks and fluctuations in global commodity prices. African nations must prioritize economic diversification, developing robust and resilient economies that are less susceptible to external shocks. By diversifying their economic base and investing in sectors such as manufacturing, technology, and services, countries can enhance their resilience to economic volatility and promote sustainable growth.

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The economic collapse in Zimbabwe had dire consequences for its population, with widespread poverty, unemployment, and social unrest. African nations must prioritize inclusive growth policies that foster equitable distribution of wealth and opportunity. Investing in education, healthcare, and social safety nets is crucial for reducing poverty, enhancing human capital, and promoting social cohesion. Sustainable economic development must prioritize the well-being of all citizens, ensuring that growth is inclusive and benefits the entire population.

While the days of hyperinflation might seem to be behind Zimbabwe, the scars of economic turmoil are a sobering reminder of the importance of prudent monetary policy and responsible governance. And how other African nations can learn from it.

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