Reserve Bank Governor Dr John Mangudya said that with the withdrawal of foreign currencies as legal tender the country required an injection physical bond notes to cover the cash needs. According to him the country currently has 600-800 million in bond notes which falls far below the estimated need of 1 – 1.5 billion.
To that end, the Reserve Bank will introduce 400 million worth of bond notes to the market. The Governor was quick to allay fears of inflationary levels of printing. He asserted that it would only be the extent that the cash situation must be improved. Those with long memories will laugh a little as these words surely remind of the purpose of the bond notes and coins at inception – to alleviate change and small denomination problems.
Money supply growth has been one of the factors that have led to the depreciation of Zimbabwe’s domestic currency. Initially introduced at parity to the then unit of account the US dollar the fortunes of the currency have changed as much as its names. That the notes and coins were initially introduced to the value of 300 million and we now between 600-800 million shows the trajectory. Of course, the bond notes were used as both an export and diaspora remittances incentive along the way.
Of greater concern is the money that can be printed but not seen. Zimbabwe has since the introduction experienced money supply explosion through the incidence of electronic money. In fact, the M1 money supply measure paints a clear picture. Money supply growth has tapered off recently but there is a lot of electronic money in the system that simply cannot be covered by cash. This is a simple explanation of Zimbabwe’s cash crisis.
After the reintroduction of the Zimbabwean dollar, a raft of measures has been introduced. Again with poor communication, the government’s policy inconsistency has been put on display. Government officials spent quite a lot of time fire fighting yesterday to clarify the position on the status of Nostro FCA accounts.
It’s important to be mindful of the surplus with this news. The surplus that the government has experienced has been largely due to the Intermediated Money Transfer Tax. A move back to a cash-based economy would not really be in the best interests of the tax collector in light of this. It would be crazy to kill the goose that lays the golden eggs. Then again stranger things have happened.