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New ZW$50 note well overdue?

08 Aug 2021 at 16:06hrs | Views
Vince Musewe
The Reserve Bank of Zimbabwe (RBZ) recently introduced ZW$360 million worth of a new ZW$50 dollar note into the market, having taken regard of inflation and the need for convenience. The new note is worth about US60 cents using the official exchange rate and US34 cents using the alternative parallel market rate. Public reaction has been muted given the perceived value of the new note against the USD exchange rate. Some criticism has been that it's just too little to make a difference when it comes to convenience.

Currency issues are and will remain a sore issue in Zimbabwe since the introduction of the bond note a few years back. The hyperinflation experienced by citizens in 2008 remains like a nightmare on the brains of all those who suffered under it and it will be very difficult to expunge. Added to this, is the significantly large informal sector which mainly deals in cash and is very sensitive and quickly reacts (sometimes over-reacts) to any currency management policies. Zimbabwe's monetary economy is hardly driven by economic fundamentals, but by the overwhelming informal sector's psychology on money (behavioural economics). Because of this, monetary authorities will continually face an uphill task in trying to regulate what is essentially an unregulated fierce market whose only concern is survival and profit at all costs.

The introduction of any new notes must, of course, be underpinned by effective monetary and fiscal policies to limit inflationary pressures that may result. It must certainly not frivolously increase the quantum of money supply as this would be tantamount to printing new money and would be in conflict with the intention of reducing the inflation rate.  As at June 2021 Zimbabwe had a total of ZW$3.8 billion of bank notes in circulation accounting to just 1.3% of bank deposits. The RBZ has stated that it acknowledges and adheres to international benchmarks which require that an economy must have between 10% and 15% cash in circulation against total bank deposits.

It appears that government fiscal management (minus debt management) has somewhat improved. Inflation is reported as going down from a peak of 837.53 % in July 2020 to a reported 56% in July 2021. Inflationary pressures are expected to be subdued for the remainder of the year. However, Zimbabwe's economy is rather complex and a traditional neo-classical approach to policy management has become futile in trying to tame an informal sector which now contributes an estimated 70% to GDP. Macro-economic indicators have become evidently incoherent to the socio-micro-economic conditions experienced by a majority of economic actors. This conundrum reflects the deeper misconstrued nature of the country's micro economy by policy makers. The informal sector is certainly not a homogenous broad church of economic actors who react, like robots, according to an economic policy script.

Our economy has become a complex, adaptive and dynamic system, where it is inherently difficult to prescribe or predict outcomes and responses to particular monetary or fiscal policy changes. This adds the complexity of managing currency, because you have complex unpredictable interactions amongst several networks (both formal and informal) and these interactions are dynamic and continuously with their own "emerging phenomena" evolving to shape the macro economy.

We all remember that it is the informal sector which "rejected" the ZW$5 note which is now nowhere to be seen. It is also treating the ZW$10 note in a similar fashion, where on the introduction of the ZW$50 note, prices have been adjusted upwards for no particular reason and the use ZW$10 in that sector is being phased out. This, despite the illegality of this practice, will sooner rather than later become a common phenomenon. Such are the challenges faced by the RBZ. Unfortunately our perception of value remains pegged to the USD rate, a currency which we neither own nor earn enough of through our export revenues. The reality is that you simply cannot wish this reality away nor legislate to change the psychology in that market space. A difficult task for the RBZ and Ministry of Finance.

Besides economics, the key fundamental which also affect currency value certainly includes the political economy. What is of critical importance, is a sense of stability and confidence by both locals and foreigners, that you have political leaders who will make the right calls when it comes to policy, who respect their constitutional obligations in all they do and work in the interests of inclusive national progress and development. When citizens trust their own country's leadership abilities and are confident of a better future in which they too can participate and benefit from, you can be almost certain that such a country will live up to its full potential despite the challenges it may face.

The RBZ however needs to continue its efforts in convincing the informal sector to move more aggressively towards electronic money as this will remove the unnecessary premium on and inconvenience of hard cash. This was done quite well around 2018-2019, but it seems it has since becomes less of a priority. It is very rare to use electronic payment methods in the informal sector, they all want and prefer the US$.

In my opinion, given the value of the new ZW$50 note, it appears we actually need higher denomination notes, but the unintended consequences and resultant inflationary impact of such a move are maybe too ghastly to contemplate at this juncture, given the current pricing psychology of the market.

The antidote of all this is, of course, to move away from a dual currency to a mono currency economy. For this to happen, trust levels need to improve through a social contract that must be respected by all stakeholders. Policy consistency, accountability and transparency primarily in the financial services sector are critical to build a new confidence. This also means that those in the private sector must not sabotage government monetary policy and corruption must be seriously dealt with. A de-dollarization roadmap was announced by the RBZ in June 2020 and this will be hugely dependent of creating a stable predictable monetary and fiscal policy environment and a willingness by both the formal and informal business sector to travel on that path. The best solution for any economy is to have own currency which does not wildly fluctuate for speculative purposes but whose value is underpinned by steady management of the monetary economy and productivity

The new ZW$50 note, albeit of little value, is a move in the right direction and the focus must now be on taming inflationary pressures, sorting out our politics, increasing productivity, managing our debt burden and creating an inclusive economy while dealing with corrupt practices both in the public and private sectors.

Vince Musewe is an independent economist and you can contact him on

Source - Vince Musewe
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