Reserve Bank of Zimbabwe is to start the rollout of new local banknotes with the release of $5 notes over the next two weeks, central bank governor John Mangudya said Tuesday.
Speaking to reporters after the first meeting of the monetary policy committee (MPC), Mangudya said the Bank will gradually release the currency and lift cash withdrawal limits.
“We’re going to be releasing the currency, the coins and the notes, to ensure we don’t starve the market. We also want to revise the limits upwards so people do not pay a premium for cash. Within the next two weeks we will be having the cash,” Mangudya said.
“We are going to have two things — we have bond coins in circulation and bond notes of $2 notes and the $5 note. We are going to have bond coins of $2 in circulation and we are going to have $2 of currency money (notes) and $5 notes of currency money in circulation.”
Responding to a question why the central bank was not issuing higher-value notes, given rising inflation, Mangudya said bigger notes would be introduced when inflation fears recede and confidence levels rise.
“For a start, we thought of being conservative…when we graduate, we will do what is right,” Mangudya said.
In its first notes after meeting on Tuesday, the MPC said there was too little hard cash in the market.
“The Committee noted that the level of physical cash in the economy is inadequate to meet transactional demand, considering that the current proportion of cash to broad money supply of 4% is low compared to regional and international levels of 10-15%. This low ratio has resulted in an undesirable cash premium which the Committee would like to see eliminated,” the MPC said in a statement.
The launch of the new local notes had been expected after both President Emmerson Mnangagwa and Finance Minister Mthuli Ncube said, at several occasions this year, that Zimbabwe would relaunch its local currency notes by year-end.
However, news of new notes is still likely to unsettle a market that has been shaken several times this year as government took multiple steps to ditch dollarisation and move towards a new local unit. With memories of the last hyperinflation era still fresh, new notes are also likely to cause anxiety for many.
The steps taken on the currency this year, which have included the introduction of the interbank market, the return to the local currency and regulations to ban the use of foreign currency for domestic transactions, have led to the collapse of the Zimbabwe dollar on the market, driving inflation and leaving Zimbabwe on the verge of recession for the first time since 2008.
However, the MPC says it does not believe the current exchange rate reflects forex flows.
Mangudya said export receipts were US$5.7 billion between January and October, with US$3.6 billion being exports. Some US$780 million was held in foreign currency accounts by the end of last week. Since the interbank market was introduced in February, US$1.3 billion has been traded on the market.
According to the MPC, despite official projections that the economy will contract by 6.5% in 2019, “the foreign exchange generation capacity of the economy is still sufficient to support a stable exchange rate”.
However, there’s an acknowledgment in the MPC’s statement that inflation is being driven, for a large part, by negative sentiment.
“The Committee noted that the current exchange rates may not reflect economic fundamentals based on the balance of payments position. The recent trend in the depreciation of the exchange rate was in part occasioned by an increase in reserve money and adverse inflation expectations,” the MPC said.
Inflation has also been fed by RBZ’s failure to rein in money supply growth, which increased by 80% over the first eight months of the year. This, the MPC says, “caused instability in the exchange rate and resulted in the increase of domestic prices of goods and services”. The decrease in reserve money had slowed by 10 percentage points in September 2019 from the August and the committee wants to see this contained to 50% for the full year 2019.
The current account deficit is also expected to narrow to 1.5% by end of year.
The MPC puts out a positive outlook on inflation; they see month-on-month inflation ending the year at between 10-12%, after slowing from 39.26% midyear. Zimbabwe has suspended the release of annual inflation data, to account for the currency switch, a decision that has drawn widespread criticism.
The MPC was appointed in September, as part of steps by Ncube to regain market confidence. In its first outing, the nine-member committee has come out cautious.
However, businessman Eddie Cross, a controversial pick on the MPC who has been at odds with both Mangudya and government over the direction of policy, said on Tuesday that the committee will often be at odds with its political masters, “as is the norm the world over”.
