The inaugural meeting of the recently appointed Monetary Policy Committee was held on the 29th of October and produced a statement from the committee that announced among other things the arrival of the new notes. The statement also included clear direction on the plan to battle cash shortages currently gripping the economy. The statement, however, left confusion as it promised both a new currency, simply to be known as the Dollar and further injection of bond coins.
RBZ finally accepts causes of the cash crisis, rate situation as cash and money supply
The statement contained an admission by the RBZ and the MPC of the causes of the exchange rate instability being the money supply in the country which has grown 80% in the year 2019. This has for long been held out by analysts as the cause for the value depreciation of the Zimbabwe/RTGS dollar. The RBZ also conceded the fact that cash in circulation was way below requirements of 10% of the 19 billion currently in circulation.
Cross was right
When Eddie Cross made mention of the new currency coming in November, government arms moved swiftly to dispel the notion. Today we have an about turn as the new notes are confirmed along with more bond coins. While trust in the RBZ was already ridiculously low, this further policy inconsistency will certainly deal another blow to credibility. One our authorities simply cannot afford.
There is the confusing issue of the relationship between the new notes and the existing cash representation of the Zimbabwean dollar, the bond notes and coins. While the statement clearly spelt out that the Bond Notes and coins and the new Dollar will be equivalent in value, people were left wondering why the bond coins would continue to be created if we are moving to the new notes. Furthermore, the insistence on maintaining small denominations such as the two bond (dollar) coins when inflation has made these far below requirements was questioned. In a post cabinet briefing, Finance Minister professor Mthuli Ncube said what is happening is a cash injection rather than a new currency. Essentially, a new physical representation of the already existing Zimbabwean dollar.
In further questions the RBZ governor had to explain that the deficit in cash would be injected over a 6 month period. He stated that current cash in circulation stands at 4% of money supply and a balance of $1.1 billion would be injected evenly over the next six months to achieve a 10% cash in circulation level in line with international standards. The finance minister on the other hand was quick to assert that the Intermediated Money Transfer tax would remain in place as it was important in taxing the informal sector and they would look into areas where the tax can be relaxed. The tax is still key to government revenue as recently revealed by the ZIMRA revenue report.
A few questions remain as to the effect these measures will have on the exchange rate and therefore inflation and pricing. In theory at least the overall broad money supply will not be affected by the introduction of the notes and coins as they will be swapped for existing electronic balances. The increase in daily cash withdrawal limits will ultimately have an effect on cash circulation though this will only be measured fully as the cash situation normalises. Whether or not the exchange rate will be affected and by how much all depend on how much faith we can place in the RBZ governor’s plan as announced.