Since the Reserve Bank of Zimbabwe (RBZ) announced incremental cash injections into the economy in July, bank queues have persisted; demand for foreign exchange has remained high while the parallel market has remained a major source of foreign currency for both corporates and individuals.

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The statement stated that the central bank would increase the amount of cash in circulation by 50% a month to $150 million.

A common view shared by various economists and analysts is that the money supply expansion would do little to change the behaviour of macroeconomic imbalances.

Five reasons have also been proffered for the weak impact and they include the imbalance between demand and supply, existence of the parallel market, loss of confidence by the public in the financial system and the country’s unsustainably high import bill.

Demand and supply imbalance

Economist Ashok Chakravarti said the cash injections have so far failed to improve the cash situation largely because of the persistent imbalance between the demand for and supply of cash for daily transactions.

“The position is that there is a fundamental imbalance between the demand for forex and the supply for forex and that cannot be dealt with by these small injections from here and there by the RBZ or by small increases in the nostros,” Chakravarti said.

“So, all these injections of $100 million or $200 million are not going to change any of the fundamentals. It might give relief for maybe two weeks or one month, but the bottom line is that we have to solve the fundamental problem. There is no point in tinkering around a situation which is beyond everybody’s control.”

Economist Kipson Gundani said due to exchange rate imbalances between the RBZ 1/1 bond note/USD peg and the floating parallel market rates, whatever cash is injected into the banking market would find its way to the parallel market, which offers “market rates”.

“If you inject $150 million a month, that is actually a foolish strategy because one or two things are going to happen,” a banker who did not want to be named, said.

“You will either take that cash and stuff it in your mattress or go to the parallel market and trade it where it will then be bought by an importer who will then take it out for goods. It could even be bought by a speculator and sat on.”

USD liquidity

Chakravarti also said the fundamental problem was that the cash in circulation under the current dollarised market environment would not improve until the amount of foreign currency in circulation and in reserve improved.

“I think we have to introduce a local currency for local transactions,” Chakravarti said.

“The dollar must only become a currency for foreign trade and for trading outside the country. I categorically state and repeatedly stated that the cash crisis will not end until we remove the dollar from local circulation to introduce a local currency that is the bottom line… the United States dollar will then be available for all trading transactions.

Restricting the United States dollar to trade would help ease the pressure on foreign currency.

Since dollarisation in 2009, exports have been the main source of foreign currency, followed by Diaspora remittances. But persistent trade deficits due to a high import bill have resulted in recurrent cash shortages.

Gundani also said Zimbabwe’s high import bill was due to low production.

“We are not producing. What you need to do is to look at the character of the import bill,” Gundani said.

“If you look at the import bill, the biggest import component is obviously fuel, but second to fuel comes the agriculture input and all those other things… after that there are obviously things like the capital equipment and all those kind of things and consumables at number four.

“If you look at all of those things and you take off fuel and capital equipment which we cannot produce… the rest will tell we are a country that does not produce adequately, which is why we have a high import bill.”

This is why without separating cash in circulation and for trade there will not be a significant amount of cash in the economy no matter the cash injections.

Loss of banking confidence

The banking sector has operated with low or no cash deposits since the introduction of bond notes in November 2016.

The Bankers Association of Zimbabwe earlier reported on this trend that money being disbursed by banks was not coming back.

Economists are on record stating that the majority of these depositors are keeping the money at home until such a time they begin trusting the financial institutions. The trend shows a high level of public distrust in the banking system. As a result, cash withdrawn from banks is never coming back.

The ceiling on cash withdrawals is also considered too low to ease cash demand.

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