The recently announced Monetary Policy Committee held its inaugural meeting yesterday and its chair (who happens to be the RBZ Governor) announced, post the meeting that the ‘government will be introducing new notes and coins ($2 and $5 denominations) in the next two weeks.’ Finance minister, Mthuli Ncube, in a separate post cabinet briefing, also mentioned the looming introduction of new notes. It’s important to note that these announcements are not the first ones, with the governor in the Mid-Term Monetary Policy Statement making a similar pronouncement.
Since these announcements, there has been debate about what this entails and the implications on the broader economy. Does this mean we now have a new currency? What happens to the bond notes? Will the cash queues and premiums disappear? What about inflation? We briefly try to answer these questions below:
Do the new notes signal another new currency?
No. Zimbabwe introduced a new currency in June this year through SI 142; which also brought to the end the multi-currency regime. This was initially the RTGS$ and has since transitioned to the ZWL.
Strictly speaking however, this is the FIRST time, since the Gideon Gono era that the government will issue notes for their currency. We have had the bond notes, but they were never our currency. Semantics, right?
What happens to the bond notes and coins?
The existing bond notes and coins will continue to be used alongside the newer notes and coins. Also, very interesting to note is that new bond coins will be minted. The new notes and coins will be issued at par (yes that term again!) with the existing bond notes and RTGS$ (electronic cash)
Will this ease cash queues?
Really depends on how much cash government prints and injects into the economy. As also mentioned by the governor, to function normally we need about 10%-15% of our deposits to be in form of cash. Using the last publicly available statistics and applying a conservative 10% ratio, a minimum of ZWL1 bn will need to be injected in form of cash; to buttress the just under ZWL 700m we had in bond notes and coins. We speculate the number could be larger as bank deposits have most likely increased between July and October.
Our view is RBZ will most likely drip feed the new notes into the system. This, in our view was well captured in the mid-term MPS review statement when the governor said, ‘…the bank will continue to inject additional notes and coins on a gradual basis…’ Also critical from a government perspective, will be to manage the impact of a predominant cash based system on the 2% IMTT (which we think has been the main reason why no new notes are issued). Forced to choose between availing cash for the public and increasing government revenues through the intermediated tax, government seems to have chosen the later. We have no reason to think they have changed or are changing tact!
And what about the cash premiums?
Ideally, and linked to the above, an improved access to cash should reduce or wipe out the premium on cash; currently at about 60%. For the reasons explained above, we do not think new cash issuances will be substantial enough to make any impact on the rates. While there might be short term declines as speculators take advantage of the confusion, at best rates will most likely hold at these levels.
Generally speaking, any printing of cash not backed by economic activity is inflationary as this results in money supply growing faster than output. The government is aware of this and has been at pains to explain that the new notes will be printed out of the existing stock of electronic/RTGS$ dollars. If true, this should not result in price increases. However, we have been here before and been given a lot of promises before that have been broken. Therefore, don’t hold your breath!
In conclusion, no new currency has been introduced, but new notes and coins will be issued. How this impacts cash queues and premiums, is dependent upon the quantities issued in the system. We doubt there will be much issued and therefore no change on the status quo.
As a side note, we would have preferred that RBZ prints higher denomination notes. We are already in hyperinflation and our highest note cannot even buy half a loaf! It’s just enough to buy approximately 300ml of petrol at the new price of ZWL 16.75/litre!