THE Reserve Bank of Zimbabwe (RBZ) says banks will have to swap RTGS balances for new higher denomination notes, as part of the bank’s strategy to keep a firm grip on money supply growth.
The central bank said last week that it will be introducing new higher denomination Zimbabwe dollar notes, 10s and 20s, into the market, as part of the ongoing process to bring an end to acute cash shortages.
The $10 notes, the apex bank said, rolled into circulation yesterday, while the $20 denominations are scheduled to be introduced first week of June. Since September, the bank has injected over $1 billion in new notes.
Currently, Zimbabwe has the world’s smallest denominations range, with $2s and $5s being the biggest in an economy where annual inflation reached a post-dollarisation high of 676 percent in March.
The new notes, however well-meaning, has stoked fears that the Reserve Bank will print loads of cash, as happened in the past to finance State obligations, leading to inflation, local currency depreciation and collapse of the currency.
As such, it means any further and immediate depreciation of the local currency, which was reintroduced last year after decade-long hiatus, will be precipitated by incorrect perceptions of the central bank’s otherwise well-meaning intentions.
The intervention though, amid the biting cash crunch, is because speculators and corruptible individuals with access to cash have taken advantage of their positions and situation to charge desperate customers huge premiums for them to get cash.
One can get cash from vendors on street corners at anything from 30 percent upwards, which analysts say causes price increases and weakens the currency by constantly driving inflation.
Eddie Cross, a member of the RBZ monetary policy committee (MPC) said in an interview, as the bank moves to end the cash crisis, it will take a cautious approach by making banks swap their RTGS for the notes.
Central bank governor Dr John Mangudya has been on record many times stressing the point that while the bank works to eliminate cash shortages through additional cash injections, it will achieve this by drip feeding the market.
“If there is an increase in the amount of money in circulation, as was happening during the Gideon Gono era, then there is direct relationship between money supply, exchange rate and the inflation,” Mr Cross said.
He said as the MPC, they were in agreement with Dr Mangudya’s plans to increase cash in circulation, to kill the practice by speculators of charging unjustifiable premiums for cash.
“But the only way to prevent the increase in base money (total money supply) with new cash in the market and the impact on the exchange rate is for the banks to acquire these notes using their RTGS dollar balances.
“What we are doing is that we are swapping existing RTGS cash for cash in another form and so there is no impact on money supply and if we maintain that everything should be fine,” he said.
Economist Persistence Gwanyanya said the RBZ has been clear that it will maintain a stranglehold on unnecessary money supply growth by swapping the new notes for existing RTGS dollars.
However, he also stressed the point that there was need to restore the cash balance by increasing the amount of cash in circulation to between 10 and 15 percent, which is a global standard.
“We need to restore the balance between cash and total money supply to normal balance (global standard) which says 10 percent of money supply should be physical cash.
“We desire to address the balance to 10, which is currently 3 percent or less, and has occasioned shortage of cash in the economy leading to cash premiums, which affects the exchange rate, prices and inflation,” he said.
Mr Gwanyanya said the public was apprehensive over the plans of the central bank because of their experiences in the past when sudden increase of cash, as RBZ printed, led to rapid money supply growth, inflation and currency collapse.
It is this lack of confidence and somewhat ‘unfounded’ mistrust that will likely lead to further depreciation of the Zimbabwe dollar on introduction of new notes.
The Zimbabwe dollar, in the midst of an economic precipice in the decade to 2008, depreciated rapidly leading to galloping inflation, which peaked at 231 million at the last official count in August.
Recurrence of lack of confidence, coupled with huge demand for foreign currency in an economy dependent on imports, has exerted pressure on the exchange rate, which has slid from $2,5 against the US dollar in February last year to $25.
The exchange rate can also be as high as $50 to US$1 dollar on the parallel market, where many individuals and corporates who want to import, but cannot get it on the formal market, buy.
Following a decade of using a multi-currency monetary regime, anchored by the US dollar, Zimbabwe’s inflation fell to record lows, at one point entering deflation, but took off after reintroduction of local currency.