As the cash crisis gravitate to a currency crisis and an unstoppable re-dollarisation it is imperative to probe the underlying drivers for posterity and for the purpose of this article look at the possible ways the crisis would have been averted from the outside. The monetary crisis prevalent has roots in economic imbalances on the fiscal side which degenerated into disparities between money supply measured as M3 which include notes, coins and broader system deposits in the form of RTGS and M1 money which is the aggregate value of notes and coins only. Notes and coins as they are measured in a dollarized Zimbabwe refers to the USD balances, bond coins and notes in the banking system. Between 2014 and 2018 the difference between these two monetary aggregates has been worsening.
Hard cash in the form of notes and coins either bonds or USD has gradually been tapering off but at a stable rate while aggregate money supply has been rising at a very sharp rate. As at August 2018 these 2 values were in the following region $500 million for (M1) notes and coins combining USD and bond notes and coins and $10 billion for money supply. This variance equates to a cash ratio of 4% which is grossly below the international average of between 15% and 20%. This average may have further come off in recent years due to digitisation although even if this discount is factored the variance remains high.
Hard cash facilitates day to day local transactions especially those of lower value while in the case of an importing country such as Zimbabwe, it also facilitates the importation of goods and services and other trade payables including creditors. So at any given point the central bank should provide adequate cash in banks and forex reserves to facilitate swift inter and intra trade. Pressure on hard cash normally emanates from a faster increase in money supply which is reflected through deposits growth. When deposits grow, depositors start demanding hard cash at a higher rate which may cause a cash crisis. We therefore have to look at how money supply grows and paying particular attention to the case of Zimbabwe leading to the near currency collapse. The Zim government has sustainably run a budget deficit over the last 5 years, which refers to expenses overlapping income. The government has increased its budget at a faster rate than its income and the excesses had to be covered by some form of funding.
Knowing the outside world is closed for multilateral lending, government resorted to the local market for short term funding through issuance of treasury bills. To attract takers government pegged a higher coupon rate of 10% per annum which the takers found favourable as a risk free rate in periods where RBZ lowered interest rates and borrowers non-payment rates (NPLs) went up. The paper was to be further discounted in the secondary market. So when holders extend credit to government in exchange of TBs, extra credit is being created in the market and the higher the rate of issuance the faster credit is created then measured as Money Supply.
As at August 2017 total treasury bills in the market amounted to $7.6 billion, $2.3 billion having been issued in 2018 alone. In 2017 government issued treasury bills amounting to $4.3 billion. Money supply as at August had hit $10 billion which is almost the same figure as total deposits in the economy. Essentially government was recklessly creating money from thin air to sustain its programs and cushion a wide deficit with a little going on to the productive side. However government could not increase hard cash at a similar rate as broad money supply since it has no power to print US dollar notes nor does it have power to further extend bond notes beyond the $500 million threshold. The former is however more important because it facilitates international trade.
To cushion this excess in money supply government has tried in vain to speed up exports so as to earn real dollars while likewise dangling with remittances incentives to diasporans. Exports have been going up due to regulation changes in key sectors such as gold and contractor financed tobacco. The rate of growth however could not counter the speed of money creation. The challenges on the external trade side are such that Zimbabwe remains a highly importing country running a trade deficit year in year out. What money creation does is to immediately improve aggregate demand. So in recent months Zimbabwe experienced a resurge in demand with all companies recording insane revenue growth rates which were money supply fuelled. This was further buttressed by industry protectionism. When demand rises, production also responds, capacity ramps up implying increased demand for inputs. The challenge now becomes how to source inputs if they do have a foreign component. Across industry the issue of sourcing raw materials became a serious challenge.
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