Spiking money supply stokes fears of return to 2008

Harare- Injection of more money into the market by the Reserve Bank of Zimbabwe has resulted in money supply which makes up all the liquidity in the economy increasing to $20 billion in August, posing a risk to monetary stabilization as the nation is already battling spiking inflation.

This is the highest level the money supply has reached since de-dollarisation in February 2019, recording a 100% year on year growth as at August 2019 making this the worst outturn in recent history.

Month on month money supply for August rose by 15.3%, making it the second highest monthly growth in a year, following the 15.6% in July.

However, nostro balances have been growing in ZWL$ terms due to exchange rate effect with a worse off exchange rate increasing the ZWL$ value of nostro FCA hence also having an effect on the money in circulation.

Under normal circumstances, increase in money supply causes decrease in average interest rates in an economy thereby encouraging borrowing and investment, in the growth of the GDP and consumer spending with the opposite of these factors being true.

However, increasing money supply when there is no real output in the economy in the form of production and injecting money that has no basis for value will only result in inflation and when the economy is already hit by inflation as is the case in Zimbabwe, it can be exacerbated.

In Zimbabwe, an example can be the case of 2008 where the country was hit by hyperinflation when in November of that year, inflation rate spiraled out of control to an estimated 79.6 billion percent month on month resulting from the increase in money supply as the government fought to deal with high debts, loss of confidence in the money by the public and  the loss of value of the money through printing more notes.

People are wary of the way the inflation rate is going up, and are afraid of a repeat of the 2008 hyperinflation but the Central Bank says it is closely monitoring the injection of more cash into the economy in order to avoid a similar instance.

Equity Axis News.

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