CAUGHT in a dilemma between printing money and possibly fuelling inflation, or nursing acute cash shortages, President Emmerson Mnangagwa’s government has turned to militant policies, controlling some mobile money services in a bid to arrest the speculation that has been brewed by the shortages.
This past week, Zimbabwe’s central bank banned all cash- back, limited cash-out and cash-in facilities as part of efforts to eradicate the buying and selling of cash at a premium.
“All mobile payment system providers and merchants are hereby directed to discontinue cash-in and cash out with immediate effect, furthermore all economic agents are with immediate effect, directed to discontinue cash back facilities,” said a statement signed by the Reserve Bank of Zimbabwe’s deputy director of financial markets, national payment systems Josephat Mutepfa.
Meanwhile, there have not been any apparent efforts to address the fundamental problem, which is the shortage of cash.
This is despite the fact that business has implored the central bank to print more notes and mint coins to avert a huge liquidity crisis that has precipitated price hikes and exchange rate distortions in the past few months.
In a note to its membership recently, the Confederation of Zimbabwe Industries (CZI) said delays in the injection of currency into the market had emerged among the biggest hurdles confronting the economy.
“The re-introduction of the local currency and the subsequent withdrawal of the USD as a transactional currency implies that the RBZ should issue adequate notes and coins to support economic activity,” CZI said in an analysis of the mid-term monetary policy statement released two weeks ago.
It said banks had stopped dispensing cash into the market, and economic agents were feeling the heat.
Opportunities for manipulating the market have also emerged, with cash barons charging extortionist premiums for those with electronic money to liquidate into physical money.
“The increase in the demand for physical cash has worsened cash shortages with most banks not disbursing any cash at all and premiums on exchange of EcoCash for cash as high as 60 percent.
“Failure by economic agents to get cash is undermining confidence in the local currency as well as forcing economic agents to resort to the illegal transactions in foreign currency and selling cash at a premium,” it said.
The southern African country ended a decade-long multicurrency system in June this year.
But, even though the central bank accepts that “the current shortage of physical cash has led to a supply and demand disequilibrium”, it is yet to print enough notes and mint more coins to run the economy seamlessly.
Experts say the apex bank has been taking a measured approach in releasing fresh liquidity into the economy to manage inflation, which galloped past 300 percent in August.
“To take away the shortages, a new injection of about $1 billion in notes is needed, which would give a viable average notes to deposits ratio of close to 10 percent. That would drive down premiums on cash and lower the difference in RTGS to US$ and EcoCash to US$ exchange rate,” Respect Gwenzi, local advisory firm Equity Axis’ chief analyst said in emailed responses to this publication.
“The challenge here is that once that is done, inflationary expectations mount as economic agents suspect the money being printed is new money and not offset by existing deposits. It is always difficult to clarify this point especially given the low confidence levels in the issuing authorities.
“These expectations will drive the exchange rate further weaker against the US dollar and through a vicious cycle drive money supply up calling for more notes to be issued.
“The Bank will therefore have to maintain a cautious approach to issuing notes and focus more on stabilising the exchange rate than the EcoCash premiums, which is the underlying challenge,” he said.
On its part, the central bank says it will continue to inject additional notes and coins on a gradual basis, “to support productive sector and lessen the inconvenience caused by physical cash shortages to the transacting public”.
“The cash injections will not result in an increase in money supply as banks will use their existing RTGS balances to exchange for cash,” John Mangudya, the reserve bank governor said in his 2019 mid-term monetary policy statement last month.
Still, the central bank says the country’s broad money supply grew 66,99 percent to $14,78 billion in June 2019, compared to $8,84 billion recorded in June 2018.
And this, experts say has proliferated inflation and worsened the cash shortages as the gap between broad money supply and cash widens.