🧐 Why is Zimbabwe Using Scraps of Paper as Currency?

The people of Zimbabwe trust paper scraps more than their real currency. Wondering what’s going on in the country? ReadOn!

Remember how shopkeepers used to give us Kaccha Mango Bite and Eclairs as change?

Well, a bigger form of this barter system is in play in Zimbabwe: from toffees to bread and cheese, any and everything is being used as change.

And where goods can’t be bartered for spare change, paper chits are being used by stores and even restaurants.

These chits can later be used to buy goods in the same store or restaurant.

All because people in Zimbabwe have no faith in their money.

Why?

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📉 Zimbabwe’s Fall: The Trigger

The story goes back to 1980. 

After around 100 long years, Zimbabwe was finally free from the white colonists. 

The country elected its first Black Prime Minister in 1980, who represented the majority African population: Robert Mugabe.

In 1987, Mugabe became the President.

Now, in the 1990s, Zimbabwe was facing two major problems:

• Its economy was declining 

• It was witnessing a growth in population

So Mugabe, who held Marxist ideologies and was strongly against colonialism, decided to do something drastic.

He took the land of the white minority and gave it to the Black people.

The white minority was not compensated for this land, they were not allowed to appeal the taking away of this land, nothing.

And many who protested against this new Fast Track Land Reform Program (FTLRP) were killed.

More than 10 million hectares of land was taken from white farmers.

To most, this was justice. To most, this was Karma.

After all, the white majority had stolen the land of these Africans while letting them suffer hardship and poverty.

But the emotions behind this decision weren’t backed by logic. 

And this backfired for the country.

You see, Africans were denied farmlands for so long that they did not really know how to farm.

Result?

So, agricultural output declined by 60% over the next 10 years!

Now, Zimbabwe was the breadbasket of Africa.

Agriculture accounted for 9-15% of its GDP and 20-33% of its export earnings. So, its economy tanked. 

Now, to boost the economy, the government did the only thing it could, the only thing it shouldn’t have: print more money.

Well, this short-term solution may solve short-term problems by giving people more money and boosting the economy. 

But, this gives birth to a more evil problem: Inflation, the money eater.

This is how Zimbabwe fell into the inflation trap, and is now deep under.

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😈 Inflation: The Evil

Inflation eats away at your purchasing power. With the same amount of money, you can now buy lesser things.

Now, this was a problem for Zimbabwe, which now had to import food and other goods.

To solve this, the government kept printing money.

This added fuel to the fire, and increased inflation further.

By some estimates, inflation reached 79.6 billion% month-on-month in 2009.  Prices of goods were doubling and even tripling every day!

The country was out of control. 

People were witnessing cash shortages because of rising prices.

Zimbabwe’s answer: you guessed it, print more money. 

But since prices were insanely high now, you needed millions of Zimbabwe dollars for some purchases.

This would require a lot of paper and a lot of metal to print. So, the country innovated.

Out came 100 million, 200 million and even a 100 trillion dollar note!

But this was not helping. 

So, the country also tried a different approach. It tried to make its currency appear more stable, it tried to reduce the many zeroes from the new banknotes and control inflation at the same time.

How? By redenominating Zimbabwe dollars.

Redenominating simply means changing the value of the currency. 

This redenomination happened not once but thrice, in 2006, 2008 and again in 2009.

In 2009, the government announced that if you had 10 thousand crores worth of old dollars, you could have one new dollar. 

Brutal, right? 

But this didn't really matter to people anymore. 

They had given up on Zimbabwe dollars some time back and were now mainly using US dollars. 

And the government also soon realised this. It also stopped printing its own money and allowed people to use foreign currency.

Since 2019 it has tried to revive the Zimbabwe dollar, end use of foreign currencies, and even issued gold coins as legal tender.

But Zimbabwe’s inflation is still high at 92.3% and people still don’t trust the Zimbabwe dollar.

So, the multi-currency system has been reinstated. And people still use US dollars.

That’s where we come to the current problem: why are people using scraps of paper now?

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🤔 Zimbabwe’s Current Problem

You see, Zimbabwe has to import US dollars from other countries.

And countries don’t export or import spare change coins, because it makes the cargo heavy.

So, there’s a shortage of change.

Even one-dollar notes, the closest thing to change, are short in supply.

Now, even in such dire situations, no one wants to use the Zimbabwe dollar.

They have no faith in the government-printed money.

They have more faith in the scraps of paper that the businesses give as they know that they won’t dupe them.

The problem with coupons: you can’t use them everywhere.

A coupon from a restaurant won’t get you a ride on the bus.

What if you forget these coupons in your pocket and wash your clothes? 

Oops, you just lost money.

So, many just prefer to get goods instead of taking coupons or waiting for change.

Businesses have also evolved to accommodate this: they’ve created registers, apps and customised coupons to keep track of customers’ change.

But Zimbabwe is ignoring a huge problem.

It is set to end its multi-currency system by 2027.

What will happen to this whole system then? Will people accept the local currency?

Also, can institutions like the IMF and the World Bank do something to help Zimbabwe? To control its inflation and bring faith in its currency? 

The government is taking some steps towards this, like lowering interest rates from 200% to 150%.

But other steps like price controls aren’t working out as 75% of the economy is informal and doesn’t obey all laws and compliances.

The Zimbabwe government seems to be at its wits end. Solving its problems could be an interesting case study for economists.

Diving deep into Zimbabwe’s case study gave us some insightful takeaways:

• Zimbabwe’s example just proves that currency is what you put faith in. If you trust pieces of paper, they could become currency.

• At the same time, it highlights the need for a strong currency. Last year, we had seen how a strong dollar was causing the rupee to crash. So, we need to focus on strengthening the rupee and create more deals with countries to settle trade in the rupee so that it too becomes a strong global reserve currency.

• Third, it tells us a lot about the human spirit. In inflation or recession, human beings are creative and have a super strong survival instinct. Put us in a difficult situation and we will find some way out. 

What do you think Zimbabwe can do to come out of this trap?

That’s it from our side today. If you loved this story, then let us know in the comments. It will encourage us to write better. Thank you!

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