‘New cash to flow into formal sector’

The anticipated issuance of new notes and coins will result in cash eventually becoming available to formal sector players.

The limited availability of hard cash had resulted in the few notes and coins flowing into the informal sector, where it was being sold at a premium. According to the monetary authorities, cash-in-circulation will slightly more than double over the next six months, as the Reserve Bank of Zimbabwe (RBZ) injects around $1 billion to satisfy legitimate demand for coins and small notes.

And analysts say the increased cash supply will eventually flow to the formal sector, while also maintaining that the cash injection will not have an adverse impact on broad money supply in the country.

“Issuance of new notes and coins will not have a significant impact on money supply in the medium to long term as the central bank has already indicated that M1 money supply will range between 10 percent-15 percent of the total money supply.

“We anticipate that the new notes would be drip fed into the system, while the RBZ collects and offsets old notes and coins with the new ones. New notes will in the short-term bring money circulation into the formal market as both formal and informal traders will have to resort to using formal channels to access the new fiat money,” said market watchers IH Securities in its latest Zimbabwe Strategy Paper.

“Resultantly, money supply does not materially change, however, the velocity of money is expected to grow as the money circulating in the informal sector makes its way back to the formal sector.”

According to the RBZ, the new cash will entail new $2 bond coins, $2 and $5 notes of the new Zimbabwean dollar reintroduced in June this year. Although, money supply is typically associated with driving inflationary pressures, the central bank has reiterated that new notes and coins will account for part of the electronic money that is already in circulation.

Finance and Economic Development Minister Mthuli Ncube said the notes and coins will be swapped for electronic balances which will then be cancelled.

“We have agreed that it’s a currency swap, swap literally RTGS dollars for cash. Put simply, the central bank says give us your RTGS, here is your cash equivalent,” he said.

Minister Ncube said the cash and RTGS dollar swaps would reduce money supply growth, as swapped electronic dollars would then be cancelled. The process will start over the next two weeks. Thus the anticipated new notes will have no such impact on money supply.

The main driver to the local economy’s stagflation trap has been a growth in broad money supply, which registered growth of 78 percent from $5,64 billion in December 2016 to $10 billion in December 2018; while money supply stood at $19 billion as of August 2019, up 107 percent year-on-year.