At the same time, for some reason the Reserve bank has made it more difficult to pay for normal transactions using cheques and bankcards. Even transfers by banks are being subjected to strict conditionality and this is increasing demands for cash as a means of payment.
Even this week, despite the decision to issue much higher denomination bank notes, (up to Z$10 million) the cash shortage has persisted, maybe even grown worse. People ask why? What can be done about it?
The underlying cause of the cash shortage is of course the very high rate of inflation. With prices doubling every few days, people will not accept delays in payments and most firms and companies now demand cash as a preferred method of payment – a cheque will take up to one week to clear, an RTGS from the bank 4 days, by which time the payments are worth so much less. Credit has become a thing of the past.
Cash is simply a means of exchange – that is what it is created for and therefore if prices double in 10 days, you must double the volume of cash available. Because of the constraints on the capacity of the Reserve Bank to produce cash notes on this scale (roughly 10 trillion dollars a day of new cash injections) this is the root cause of the problem.
Under present conditions in Zimbabwe this is compounded by the fact that more than half the foreign currency being sold in the country is being traded for cash on the street. This has created a huge market for cash (20 trillion Zimbabwe dollars a day) and this is absorbing the majority of the available cash resources.
The principle sources of cash – supermarkets and retailers, are selling their cash for a premium to help pay for the inflated cost of replacing their stocks and this means that they are not banking their cash. Fuel is virtually unobtainable in the formal market and the informal market works on cash only; that’s another Z$5 trillion a day!
The solution? Until sanity prevails and inflation is brought under control by sound macro economic policies, the only solution to the problem is to increase the supply of cash money in the market – so that it keeps pace with inflation. For this to happen the Reserve Bank would have to slash another six zero’s off the currency and this would reduce the burden on the printing press so that they can cope with the volume of demand for new notes. This would mean that Z$1.00 would be equal to 1 billion of the “old” currency and would then be worth USD20 cents.
The bank could also ease the situation by removing the restrictions on other forms of payment – cheques and bank transfers or the use of swipe cards in retail and wholesale markets. A combination of both measures would ease the situation immediately and create space for longer-term measures. No matter what the authorities do – further adjustments to the currency will be necessary before to long in the current situation.
Post published in: Opinions