RBZ in dilemma over bank notes

This means that for someone to buy a loaf of bread they need about 40 of the local unit notes, which becomes more cumbersome for items costing over US$1.

Zimbabwe’S monetary authorities are facing a dilemma as demand grows for bigger denomination bank notes at a time when they are attempting to control inflation.

The $100 note is the highest banknote in the country, but it has been ravaged by inflation.

This means that for someone to buy a loaf of bread they need about 40 of the local unit notes, which becomes more cumbersome for items costing over US$1.

The annual inflation rate stood at 26,5% in December last year.

Last week, the Consumer Council of Zimbabwe revealed that the cost of the food basket for a family of six had shot up to $3,6 million, with retailers now charging some goods exclusively using the greenback owing to the depreciating Zimbabwe dollar.

As such, there have been calls for the government to issue banknotes with higher denominations to make it easier for people to transact.

But economists told Standardbusiness that there was a need for the authorities to balance between coming up with banknotes with higher denominations and containing inflation.

“It’s obviously a catch-22 situation for monetary authorities. On the one hand, there is a need to increase the highest denomination, given the Zimdollar inflationary environment,” economist Prosper Chitambara said.

“But on the other hand, increasing money supply, whether physical or virtual, creates excess inflationary pressures in the economy.

“So, I think that there is a need for a fine balance between those two positions or extreme positions.

“One way could be to take out of circulation the $50 and the $100 notes and then replace those with higher notes.

“Then of course, there is also a need to promote a cashless society. I think that’s very important.

“But of course, we can’t completely do away with money, fiscal cash, or banknotes and coins.”

Chitambara said the country should invest in digital economy and make it easier and cheaper for people to transact.

Another economist Stevenson Dhlamini said Zimbabwe’s largest denomination makes it difficult to transact in cash because of inflation.

“The persistent inflation will force authorities to come up with higher denomination notes, otherwise the currency might lose its usefulness,” Dhlamini said.

“In traditional monetary economics, it is generally accepted that inflation is a monetary phenomenon.

“This means that an increase in money supply is likely to feed inflationary pressures.

“However, it must be noted that if the money supply growth is channelled towards production, there is less likely to be inflationary pressure built.

“In Zimbabwe, there has been empirical evidence to support that broad money supply growth has been responsible for rising inflation.”

Economist Victor Bhoroma said given the rate of inflation, printing paper money could spell disaster for the local economy.

“So, there is no need to actually print any note which is higher than $100,” Bhoroma said.

“Alternatively, mobile money and other digital currencies need to be used in the market.

“Printing new notes or printing a currency does not solve the underlying fundamentals that affect the economy.

“The economy does not have an efficient foreign exchange market. The central bank is engaged in quasi-fiscal operations that lead to artificial demand for foreign currency on the formal and the free market.

“So, the solution lies in reforming the central bank, especially on political interference when it comes to money printing.”

He added: “But when you look at what’s happening in the market, where 95% of the transactions are now being done in US dollars.

“Then it does not make any sense to continue to hold on to the local currency, because it does not save any papers.

“The government wants the US dollar, labour wants the US dollar and corporates also want a stable currency.

“Even if some quarters may want a local currency, but in the absence of reforms or good governance, then that currency cannot hold value.”

Bhoroma said the solution is not about printing more banknotes, but embarking on reforms and implementing policies that are business-friendly.

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