ZIMBABWE’s markets are struggling to work out the full impact of a Reserve Bank of Zimbabwe (RBZ) move to inject a $50 note, which it sees as vital for stemming a dire liquidity crunch, according to researchers at Equity Exis.
Last week, the RBZ said a new $50 note would come into circulation to support the $2, $5, $10 and $20 notes which are already in circulation but have been battered by an inflationary rage.
Zimbabwe has battled a lengthy liquidity crunch since it introduced bond notes in November 2016, which created a foreign currency black market that has been spiriting notes and coins out of the official market.
The blossoming parallel currency market is so powerful that cash is readily circulating among the dealers driving it while banks have none.
The RBZ will likely drip feed the $50 notes into the market to manage inflation-inducing money supply growth.
But without ruling out an inflationary surge, analysts at Equity Exis said measuring the full impact of the injection would be difficult.
“The impact of the injection cannot be readily ascertained given the quantum expected to be injected is not yet known,” Equity Exis said.
“The overall notes and coins balances in the economy in Zimbabwe dollar terms, however, remain grossly below the rule of thumb or global averages of circa 15%. The RBZ has long made clear its intentions to drive the average to about 10% of total money supply,” the report noted.
Equity Exis said maintaining a 10% target would be difficult under a volatile climate.
“The challenge, though, is that with a fast depreciating currency and spiking inflation, M3 (money supply) is a moving target since it alters more frequently and with larger changes, under the circumstances. Thus injecting new notes based on the prevailing total money supply when the exchange rate is depreciating at higher rates is tantamount to causing further inflation, assuming the quantum of new cash injections are proportionate to the growth in money supply,” it said.
Tapiwa Sibanda, Head of Research at Trade Winds, said the RBZ had learnt from the past how “black market kingpins behave” each time a currency comes into circulation and was unlikely to give key details of the quantum that is due to be realised.
Economist and former minister Gorden Moyo, who now advises the Public Policy and Research Institute of Zimbabwe, says the injection of a higher denomination note without improved production and exports could see the country relapsing into another inflationary rage.
“It is a basic fact that printing money, let alone higher denomination notes, without being backed by production and productivity, export returns, and foreign currency earnings is a recipe for hyperinflation of gigantic proportions,” he says.
“This will trigger price hikes and other related inflationary pressures across all sectors of the economy,” he says.
Talk of cash injections into the economy usually provokes market jitters following the 2007/2008 quantitative easing era when relentless injections pushed inflation to 500 billion % and knocked the Zimbabwe dollar out of the market.
In a way, however, the central bank could be handling the currency issue carefully.
In recent years, full disclosures have armed black marketers with the arsenal to prepare how to drive out notes as soon as they are released.