LIVINGSTONE MARUFU
The Reserve Bank of Zimbabwe (RBZ) is expected to release the new ZWL$50 notes soon as part of measures to address cash shortages in the economy, but economists have warned the move would trigger high inflation.
Zimbabwe’s annual inflation rate stood at 240.55% in March compared to 321.59% in February.
The central bank has forecast annual inflation will end the year below 10%, which several analysts say it was an ambitious target.
But the printing of higher denominations of the notes, economists said, could push up prices of goods and services which in turn will trigger high inflation.
At the peak of hyperinflation in 2008, Zimbabwe suffered a staggering annual inflation rate of 231 000 000 % due to excessive printing of money.
“Technically it is a good idea to bring in ZWL$50 note but the continuous delay by the central bank causes speculators to increase prices of goods and services as they have already increased since the central bank announced the plan and will do so after the issuance (of the new ZWL$50 note),” economist Gift Mugano told Business Times.
“Speculators will peg the price in tandem with the new note and that has nothing to do with the increase of money in the market but purely behavioural economics where they want to see new denomination valueless.”
Mugano urged the central bank to drop the new notes without any announcements.
Another economist with a leading bank, who requested anonymity, said the price dynamics were influenced by the level of money supply in an economy as opposed to its composition (electronic money, transfers and cash), hence RBZ’s firm commitment to keeping the level of money supply growth under control through its conservative monetary targeting framework.
“We certainly need cash in the economy as many people in remote rural Zimbabwe need it for transacting purposes while people in towns need it for convenient purposes,” the economist said.
“However, the printing of new notes evokes bitter memories of 2008 where local currency was valueless.”
RBZ governor, John Mangudya said the bank would contain money supply growth and insisted that the printing of ZWL$50 notes would not trigger inflation as it augments the current cash in circulation and does not push money supply.
The apex bank, Mangudya said, has continued to implement a conservative monetary targeting framework in order to contain money supply growth, reduce pressure on the exchange rate and stem inflationary pressures in the economy.
As a result, RBZ achieved a conservative quarterly growth in reserve money of 18.6% in 2020, against a target of 25% per quarter.
In his Monetary Policy Statement, Mangudya said the containment of reserve money is way below the set quarterly targets and attributable to the bank’s active mopping-up programme through open market operations and the strong fiscal consolidation measures.
As at the end of December 2020, reserve money was ZWL$18.76bn, compared to a year-end target of ZWL$25.20bn.
On the printing of the new note, Mangudya said, the additional notes would boost the amount of cash in circulation and would not fuel inflation.
Zimbabwe’s money supply increased to ZW$184bn at the end of December 2020 due to the impact of exchange rate movements on the 60% foreign currency component of the deposits.
