Zim dollar velocity drives demand — RBZ

Eddie Cross
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The Reserve Bank of Zimbabwe (RBZ) says higher velocity of local currency (frequency money is used to pay domestically) in the economy has stimulated demand for goods and services.

The central bank chief said this had driven industrial output and economic growth, although the country had also seen a surge in inflation.

It is estimated Zimbabwe’s economy grew by 7,8 percent in 2021 driven by strong aggregate demand, bumper agricultural output and massive Government infrastructure projects.

Velocity of currency is a measurement of the rate at which money is exchanged in an economy. It is the number of times money moves between entities.

Central bank deputy director economic research, Dr Nebson Mupunga, said the velocity of local currency in Zimbabwe currently stands at 7:1.

Dr Mpunga said this at a financial and industrial breakfast meeting, arranged by Global Renaissance Investments, held in the capital yesterday.

He said the growth in aggregate demand was a result of economic desire to nippily spend the local currency on goods and services as opposed to using the US dollar, which people choose to hold as a hedge against inflation.

He was, however, quick to point out that the increased use of local currency in the domestic economy had driven a spike in the parallel market exchange rate.

The scenario has also pushed up inflation as local shops have continued to benchmark their price using the parallel market exchange rate.

“We continue to witness some increases in aggregate demand in the economy and that increase is mainly attributed to the use of local currency, what we have discovered is that the velocity of local currency is very high.

“Part of the 7,8 percent that we witnessed last year is also attributed to the use of local currency because what is happening is that people are quick to change local currency into either buying goods and services and some are also buying foreign currency,” said Dr Mupunga.

He noted that increased use of local currency was also prompting buying of forex on the parallel market, which pushed the exchange rate and inflation.

“…on the downside, we find that the conversion of local currency is causing unnecessary pressure on the demand side of the foreign currency.

“As a result, we have also witnessed the parallel market rate depreciating and in the process causing a rise in price which has a pass-through effect to cause inflation,” he added.

Dr Mupunga said the recently announced monetary policy thrust was to stabilise the currency exchange rate and reduce inflation to low and sustainable levels.

“As RBZ we issued the MPS whose thrust is to stay the course of fostering price and financial system stability because as I have indicated the inflation has been going down from 837,5 percent in July to 60,7 percent in December and 60,6 percent in January this year; we would want to see that trend continue,” said Dr Mupunga.

At the event, economist Eddie Cross implored the authorities to roll out more measures to stabilise the exchange rate and lower inflation. He said this was critical to ensure predictability in the economy, stressing that if inflation levels remain high the economy would drift towards dollarisation.

“The question is how do we stabilise today? How do we stabilise the situation? I have said to the Minister of Finance and Economic Development there is only one issue on your table in 2022, which is exchange rate stabilisation.

“If we continue on this path we will need to dollarise, but dollarisation is not part of industry and manufacturing sector interest,” said Mr Cross. – Herald