Black Friday 1997: How the Zimbabwe dollar crashed and tipped the economy over the brink

14 November 1997 – dubbed “Black Friday”-  is a day that will forever be etched in Zimbabwe`s economic history as the cataclysmic point that triggered Zimbabwe`s economic free-fall. Below is a brief chronicle of the events leading up to this seminal day, and what ensued in the aftermaths of Black Friday.

In the second decade of its independence, the Zimbabwean government launched an economic reform programme essential in liberalizing the economy and dealing with the structural impediments to growth. However, fiscal policy was weak and monetary policy unsteady during the time period; and the country suffered from two serious droughts (in 1992 and 1995), which affected Zimbabwe’s agriculture, its primary economic industry. A land reform had been a highly contentious issue since independence, as the majority of prime agricultural land was owned by about 4,000 white commercial farmers; while the indigenous population continued to engage in subsistence farming.

In the first five years of independence, land resettlement was conducted under government’s “first option to buy” at market prices: resulting in resettlement on some 3 million hectares. Subsequently, the 1992 land Acquisition Act provided for compulsory purchase of farms, as long as the property was derelict, located on underutilized land, owned by absentee landlords, or surrounded by communal areas, and the owner had multiple farms. The act required fair compensation and provided a right of appeal. In the second half of 1997, under mounting political pressure, the ZANU-PF government announced a new compensation and pension plan for war veterans of the independence struggle.  The pay-outs applied to approximately 60,000 war veterans, each of whom were to receive an immediate compensatory payment of ZW$50,000 (the equivalent of US$ 3,000 at the time), alongside a monthly pension equivalent to US$ 125.

 The total package amounted to approximately 3 percent of the 1997 GDP; and was not included in the 1997 budget for the fiscal year. The payments had the immediate effect of inflating the budget by 55 percent on the previous year. The following month, Zimbabwe’s standing line of credit with the World Bank was suspended until the government had demonstrated that the payments would not result in a higher than the projected 8.9 percent budget deficit in the 18 months leading to December 1998.

Following the new pension package, the war veterans expressed discontent with the success of the previous land reform program, and began to press for its acceleration. In November 1997, President Mugabe responded to these pressures, announcing plans for the compulsory acquisition of white-owned commercial farms, again without elaboration on the financing side of the transaction. Thus, 1,471 commercial farms, representing a significant portion of Zimbabwe’s commercial farming land, were gazetted for compulsory purchase.

The lack of budgeted financing for both the pension payment packages and the land acquisition process created investor panic about the future fiscal position of the Zimbabwean government. The resulting flight of foreign capital caused crashes in the Zimbabwean money and capital markets and exhausted the foreign reserves of the RBZ. This culminated in the crash of the Zimbabwe dollar on   November 14, 1997, a day referred to as “Black Friday” by Zimbabweans, when the Zimbabwean dollar lost 75 percent of its value against the US dollar.

At the time, it was government’s intention to finance the scheme through tax increases in the 1998 budget; but the widespread protests of January 1998, organized by the Zimbabwe Congress of Trade Unions (ZCTU), resulted in a reversal of this policy when the government was forced to monetise the debt. The food riots erupted in response to the steep rise in the cost of “mealie meal,” paralyzing the country for two days. In response to the public pressure, the government introduced price controls, accusing Zimbabwe’s industries of “profiteering”. Then in September 1998, even as economic conditions continued to worsen, the President sent 11,000 troops to the Democratic Republic of the Congo (DRC) to back the discredited leader, Laurent Kabila; who was facing a civil rebellion backed by Rwanda and Uganda. The military move was unbudgeted.

At the same time, the government continued its land reform process, issuing acquisition orders in November 1998 to 841 farmers who had contested the 1997 compulsory purchases. The state also reacted to the growing influence of the trade and labour unions by imposing the Presidential Powers (Temporary Measures) labour Regulations of 1998 which imposed heavy penalties on trade unions and employers that incited or facilitated strikes, stay-away, and other forms of unlawful collective action. In early 1999, the government’s increasingly controversial activities caused foreign donors to begin scaling back them with both the World Bank and the IMF suspending aid The pressure on the Zimbabwean dollar continued to build as Zimbabwe’s foreign reserves dropped to dangerously low levels. In response, the RBZ reintroduced widespread import controls and banned foreign currency accounts (FCAs).

The banning of the FCAs effectively meant that the RBZ was authorized to retain all export proceeds. In response to economic pressures, the government reached an agreement with the IMF for the initiation of an economic recovery program, supported by the 1998 Stand-By Arrangement.  The program aimed to achieve a decline in inflation to 30 percent by the end of 1999 (from the 47 percent level in 1998), real GDP growth of 1.2 percent, and a US$160 million gain in net official international reserves.  This adjustment in fiscal policy was to be supported by tight monetary policy and confidence-building measures, including aligning the land reform process to the strategy agreed upon during the 1998 international conference; disclosure of the cost of Zimbabwe’s involvement in the DRC conflict; a rollback of emergency trade and capital controls; and an acceleration of the privatization of state-owned public companies.

However, action under the program was weak, and inflation continued to rise to a peak of 70 percent in October, before easing to 57 percent by the end of 1999. Real GDP also fell by 0.2 percent as a 7 percent decline in manufacturing output more than offset gains in agriculture and tourism.  Net international reserves had increased by US$314 million in 1999, but pledging and collateralization of foreign assets had left usable reserves depleted.

In summary, by the turn of the millennium, Zimbabwe’s economic situation had become precarious.  As a result of its political positions, the country had lost access to international aid.  Furthermore, as a result of decreased investor confidence alongside a fixed exchange rate regime, foreign reserves had been effectively depleted by the RBZ’s attempts to prop up the currency. The monetary and fiscal authorities had already begun to use the printing press to finance the deficit, initiating Zimbabwe’s run toward hyperinflation.

Compiled using data from the IMF Staff Reports and a Working Paper on Hyperinflation in Zimbabwe by Jayson Coomer and Thomas Gstraunthaler published in the Quarterly Journal of  Austrian Economics