Zimbabwe: Government Should Introduce Higher-Value Denominations

The Reserve Bank of Zimbabwe (RBZ) should consider introducing higher value denominations than the current ZW$5 in order to reduce seigniorage losses, businessdigest has learnt.

This comes after the central bank announced plans to introduce new bank notes and coins by November 11 in an effort to increase the availability of physical money in the country as chronic cash shortages are causing acute economic challenges for ordinary Zimbabweans.

The new ZW$2 and ZW$5 notes, and ZW$2 bond coin will be used interchangeably with the bond notes that are already in circulation.

Economist Brains Muchemwa said there was a need for the government to consider injecting higher value denominations as is standard practice in other countries in the world, adding this will help to curb seigniorage loss.

Seigniorage loss is more commonly experienced in the production of coins because the metal used to produce the coin has inherent value. This value, often called the melt value, may be higher than the denomination it originally represented, or, when combined with production costs, may result in a loss.

"In order to reduce seigniorage losses, the RBZ needs to introduce bigger denominations than the current ZW$5, otherwise we become a nation majoring in useless experiments when we have the whole world to learn from," Muchemwa said.

Given that most people in the country are in the informal sector, the government should inject notes and coins that are 25% of the money supply, he said.

"In light of the size of the informal sector and the huge confidence deficit in the economy, the RBZ has to consider injecting notes and coins at about 25% of the money supply, net of foreign exchange deposits," he said.

Muchemwa said should the central bank inject sufficient quantities that satisfy the transactional demand in the economy, they will eliminate the implicit taxation being imposed on the defenceless citizens that have to buy cash at premiums as high as 60%.

Economist John Robertson says when the new currency is introduced, the premium being paid to convert EcoCash and swipe money into cash will disappear.

Also, access to cash will mean that payments in cash will no longer bear the 2% tax.

In order for the notes and coins to continue circulating in the market freely, business should bank their cash, he said."Businesses will be paid in cash more often, but if supply of notes remains constrained, the businesses will be reluctant to bank their cash takings every day. If they choose to hoard cash, instead of banking it, the process of change will slow down," Robertson said.

He said the RBZ should not give the money to government to pay for its expenses in order for this change to work."The move by RBZ should be effective. But it could become a problem if RBZ issues it to government to meet expenses such as wages. That would cause even higher rates of inflation. Government should receive these notes only when taxes are paid with notes," he said.

"If they are issued and used responsibly, they should make no difference to inflation. That is high now because the exchange rate was caused to become unstable by the money creation caused by the issuing of billions of Dollars-worth of Treasury Bills."

Economist Eddie Cross said the central bank's move to inject new coins and notes should make business easier as cash will be more readily available and the cash premium in the market will disappear.

Cross said the government's move would not affect inflation because the new notes and coins would only be released after conversion of Real-Time Gross Settlement (RTGS) dollar balances.

RTGS dollars were created when the government introduced the Zimbabwean dollar as the sole legal tender in February this year.

Zimbabwe has been facing an acute cash shortage and the use of electronic money has failed to solve the problem, creating a three-tier pricing model, which the government is battling to dismantle. The cash shortages have also led to frequent price increases, causing inflation.

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