The Government needs to inject approximately $2,5 billion in local notes and coins to solve cash crisis, but fears of spooking currency stability and reversing gains made in becoming a cash lite society has seen the Reserve Bank of Zimbabwe adopt a gradual approach that has, however, caused untold suffering for those in need of cash including businesses that are now witnessing depressed sales volumes.
The country is going through a crippling cash crisis that has seen local notes and coins being sold at a premium upwards of 50 percent as of this week.
Cash withdrawals from local banks and other financial institutions have dried out with
the transacting public resorting to mobile
money agencies to access cash at a punishing premium.
The premiums on cash, among other causes such as a depreciating exchange rate, has significantly eroded disposable incomes resulting in a sharp drop in sales volume for business.
The RBZ in its Mid-Term Monetary Policy Statement (MPS) acknowledged the need for more notes and coins saying:
“The re-introduction of the local currency and the subsequent withdrawal of the US dollar as a transactional currency implies that the bank should issue adequate notes and coins to support economic activity.
“The increase in the demand for physical cash has worsened cash shortages, as reflected by unending queues at most banks in the country,” reads the MPS in part.
The shortages have also had an impact on visitors to the country including tourists who are failing to access cash for their domestic transactions, as they are supposed to buy local currency cash from banks or bureaux de change.
This failure to get cash, according to the central bank, “is undermining the confidence in the local currency as well as forcing economic agents to resort to the illegal transactions in foreign currency and to selling cash at a premium.”
However, despite this glaring need for more notes and coins into the system, the RBZ has been hesitant to inject more cash.
Instead, the bank said it will continue to
inject additional notes and coins “on a gradual basis,” amid fear or prejudicing “our cash lite society
drive which has served the country well.”
Currently, cash in circulation only amounts to $600 million or 4 percent of broad money supply; way short of international standards where cash levels in circulation accounts for between 10-15 percent of broad money supply.
Broad money supply, as at end of June 2019, stood at $15 billion and the $600 million in circulation is inadequate according to international standards.
There is also misplaced fears, among the transacting public, that increasing local cash levels will result in inflationary pressures and increase money supply. The RBZ cautiously dismisses this fear advising that “the cash injections will not result in an increase in money supply as banks will use their existing RTGS balances to exchange for cash.”
Economist Pascal Mandeya, agrees saying injecting more notes and coins is not inflationary but “elementary.”
“If that money is issued through banks only, cash in circulation will increase while demand deposits will come off. So overall broad money supply will remain the same,” said Mandeya.
Another economist Brains Muchemwa, concurred saying “the physical cash printed will not add to the total stock of money supply.”
“Banks will exchange their RTGS balances for cash with the RBZ and in turn, net off against the electronic balances of individuals as they withdraw cash from banks. There is no money creation here,” Muchemwa said.
The needed issuance of physical cash, is a departure from the past where the RBZ would print money to pay for goods and services. In this case it would be issuing notes in exchange for electronic balances belonging to depositors.
Mandeya, however, said the overall demand for foreign currency might increase as it is easier to buy forex in cash than with electronic money. He suggested that the RBZ continues with its gradual approach to physical cash injection as a way of pushing transactions towards tax paying businesses.
Government has obligations that it has to meet, to fund its activities including payment of salaries, so it will be best saved if more people stop chasing cash but source goods and services from formal businesses that pay tax, said Mandeya.