High premiums increase demand for cash

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WITHOUT addressing high premiums, it is very difficult for the country to deal with the high preference for cash, a financial expert has said.

BY TATIRA ZWINOIRA

Speaking to NewsDay on Friday, financial expert, Persistence Gwanyanya said high premiums created demand for cash.

“Without addressing the issue of cash premiums, it is very difficult to deal with the high preference for cash. It is hoped that the Afreximbank $600 million facility will go a long way in reducing the backlog on nostro payments and manage down the cash premiums,” he said.

“With lower premiums, business enterprises are indifferent between electronic money and cash, hence, increased acceptance and usage of electronic money. But, as long as the cash premiums continue to increase, there will be more preference of cash in transactions, hence, its high demand.

Gwanyanya said curbing high cash premiums would make electronic money and cash at par, which would reduce dependence on hard cash from the transacting public.

Cash premiums jumped in recent weeks following a serious shortage of foreign currency in the country, leading to shortages of fuel and cooking oil.

Seeing an arbitrage opportunity, cash dealers raised cash premiums to between 40 and 45% on a cash-to-cash transactions, apart from the traditional cash-to-transfer basis.

This contributed to panic buying that started on the back of social media reports touting a return of the basic commodity shortages as experienced in 2008. The Confederation of Zimbabwe Industries said businesses get a quarter of their foreign currency requirements from the parallel market.

According to the Reserve Bank of Zimbabwe’s July monthly economic report, there was $276,82 million in cash transacted or circulated.

Economist, Prosper Chitambara agreed that a reduction in premiums would reduce the cash demand in the country, but that needed to be buttressed by dealing with the fundamentals.

“From my understanding, the issue of premiums is coming from the fact that we do not have foreign currency and also it is something that is being done illegally. I think the best way of dealing with that is to bring back confidence into the market and that is being affected by a number of factors. There are economic uncertainties, for example, the direction of economic policy so there are uncertainties,” he said.

Chitambara said this weakened or corroded confidence on the market.

This comes as cash dealers have gone underground to do their deals.