Cash in circulation will slightly more than double over the next six months, as the Reserve Bank of Zimbabwe (RBZ) injects an extra $1 billion to satisfy legitimate demand for coins and small notes, but still make it impractical to use cash for larger transactions.
RBZ Governor Dr John Mangudya said yesterday that the $2 bond coins and $2 and $5 notes being eased into circulation will, when added to $855 million bond notes and coins already in use, bring issued cash to just under 10 percent of total deposits in both local and foreign currency.
Cash shortages have been building up in the informal sector, including public transport, where mobile and digital payments are rare, although cash transactions have almost vanished in the formal sector.
By doubling the amount of cash in circulation, the RBZ hopes to ease pressures that have seen high premiums for cash, yet by keeping the top denomination at $5, it is hoped that significant payments in the formal sector will remain digital rather than see people shovelling coins out of wheelbarrows.
That should ease demand for cash, making it flow better through the system.
Taking into account the inflation of the past year, the latest move puts the total value of all local currency notes and coins, including those still to be issued, back roughly where it was a year ago.
Many, though, still think that some people will continue to sleep outside banks to head the queue for small daily allocations of cash and that the market for notes and coins will continue, although premiums will fall significantly because of extra supply.
But as long as there is even a tiny premium, some will find it worthwhile to queue overnight.
Economists here thought the RBZ should think of ways to stop all the new cash being almost absorbed into the informal sector, as has happened with earlier allocations.
They also dismissed fears that the cash injection would trigger inflation, arguing that price hikes were a result of many internal and external factors within an economy and that at 10 percent of deposits, the amount of cash in circulation was still be low by international standards.
Addressing Members of Parliament attending the 2020 National Budget seminar at Elephant Hills Resorts here, Dr Mangudya said the cash will entail new $2 bond coins, $2 and $5 notes of the new Zimbabwean dollar reintroduced in June this year. During the same address, the central bank governor said fundamentals were showing that the local currency, renamed Zimbabwe dollar in June after the Government outlawed the use of multi-currency adopted in 2009, should exchange at $5-$8 against the US dollar.
The central bank is seeking to eliminate the prevailing cash shortages, which the country experienced since 2016 as well as huge premiums being charged for cash.
Dr Mangudya said the regional average of the total cash to deposit ratio was 12 percent, but countries such as Tanzania have up to 15 percent of their deposits in the form of cash.
At the moment, Zimbabwe has about $19 billion in circulation, with only 4,5 percent being cash.
The actual money supply is skewed, with about half being funds held in foreign currency accounts, while the balance are local dollars, which have not been expanding in number since the Government moved to a primary budget surplus a year ago.
"Zimbabwe has the lowest (cash to deposits) ratio," Dr Mangudya said. "Zambia has 10 percent, Tanzania 15 percent, Rwanda 9,65 percent, Uganda 17,65 . . . We want to increase to 10 percent over the next six months on a drip feed basis."
Dr Mangudya said if the total deposits were converted into US dollars at the ruling interbank rate of 15,5, the country essentially had US$1,2 billion deposits, which is very little to sustain the economy, stressing the need to enhance forex generation.
"Fifty percent is foreign currency, the amount held in foreign currency accounts (FCAs) is about US$700 million," he said. "Fifty percent of Zimbabwe's money supply is foreign currency and $9-10 billion is real domestic currency."
The central bank chief said the local currency, which has lost ground against the United States dollar since February when the 1:1 pegging to the greenback was abolished, had depreciated extensively due to lack of confidence in it as store of value.
He said while the interbank exchange rate stands at 15,5, "the real exchange rate should be $5-$8. The balance is confidence and risk premium," he added.
Measures were underway to enhance confidence in the local currency, including floating exchange rate system and allowing a willing-buyer, willing-seller trading system.
"We believe in a free market system," said Dr Mangudya.
"If we close the free market, we create the parallel market. Between July and September there was consistency between parallel and official exchange rate of 15-20 percent disparity.
"Our wish is to narrow the gap, which is why the RBZ adopted the willing-buyer, willing-seller exchange rate system. This would also be enhanced through formalisation of the economy, which currently is about 60-40 informal to formal."
The volatility in the currency was to be expected following currency reforms that resulted in the country de-dollarising after outlawing the multi-currency system, said Dr Mangudya.
Zimbabwe had faced relentless instability from its reform agenda due to the absence of external funding support unlike countries like Argentina, which got US$57 billion and Greece, which received US$360 billion from the IMF for their reforms.
"We do not have a lifeline, we are by ourselves," he said.
As such, Dr Mangudya said, the solution lay in being productive and addressing structural rigidities in the economy.
The central governor reiterated his remarks on Tuesday when he said 50 corporates in Zimbabwe held half the country's $19 billion total money in circulation, meaning all the rest of us "share $9 billion and need to grow entrepreneurship."
Economist Persistence Gwanyanya said the introduction of cash was part of transition to a normal economy, since all other countries use their own fiat money currency.
"Money was being sold at premiums as high as 50 percent, which is not desirable and which is also inflationary in nature, so that issue needs to be sorted out with the coming of a new fiat currency," he said.
"In my view it's not going to cause inflation, inflation is a function of many other factors like confidence, like manipulation of the market, so we should be wary of those things as this fiat money is introduced.
"Our people are enterprising on currency, that's what it is because there are no jobs. That's a source of livelihood for our people, so you also need to know the circumstances that confront us that any weakness can be taken advantage of by the market which is largely informalised and experiences high levels of unemployment."
Mr Gwanyanya said currency was not a permanent solution to the country's problems.
"We should start to seriously produce, otherwise we will not get out of our currency crisis," he said. "If we don't produce, so what we are doing are only short-term solutions, what is really important is to tackle the issue of production head-on and tackle the issue of confidence head-on so that our currency becomes stable."