EDITORIAL COMMENT
ONE of the key monetary policy stances that has been pursued by the Reserve Bank of Zimbabwe (RBZ) in the fight to stabilise the volatile currency has been containing money supply growth.
Restricting the amount of notes and coins circulating in the economy brings two key benefits.
The first is that it helps monetary authorities keep inflationary pressures in check, especially in an economy like ours, where currency volatility has been wreaking havoc on the markets.
This bodes well for government’s target to bring down inflation to about 135% this year, from over 400% last month.
Secondly, reining in money supply and controlling inflation helps the economy contain rocketing prices, which returned to haunt consumers in the past year, even as government claimed stability had returned.
To some extent, the RBZ’s disinflationary targets, through containing money supply growth, have worked, certainly because authorities had until now shied away from printing notes.
But we were taken aback by the recent decision to introduce higher denominations on the markets, which we feel have a push factor on inflation.
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The obvious immediate effect will be sudden price hikes by retailers which will make life difficult for the ordinary citizen.
These people already face an uncertain future because their firms’ survival is under threat from the COVID-19 pandemic.
With rampaging prices compounding the already bad situation, life in Zimbabwe is likely to be more difficult. With no incomes, people will struggle to buy basics. We have seen this before. When inflation is rocketing, the value of the currency is eroded, with implications on the exchange rate.
This is why we feel that the RBZ’s decision, while good for improving liquidity in a currency-starved market, must be twinned with efforts to balance it with avoiding another inflation upsurge.
Perhaps the introduction of new denominations must be limited to notes of up to $50. Beyond this, the central bank risks triggering another wave of inflation.
Another worrying thing is that once government resorts to printing higher denominations, it is a way of admitting that things are bad in the economy.
It is a subtle way of telling the markets that our currency is depreciating at a frightening pace, and the smaller denominations can’t cope anymore. This means the RBZ must do the right thing or we end up like Venezuela.
