4 things that could happen after RBZ introduces $10 and $20 notes

Danger

The Reserve Bank of Zimbabwe will try to do away with the problem of cash shortages later this month according to Eddie Cross. No doubt, it’s a noble act because cash shortages have been hurting the average person.

But the law of unintended consequences could play its hand in this noble affair. It could be another “policy misstep” as Finance Minister, Mthuli Ncube once said.

I hope you won’t label me as a prophet of doom and I also hope not to realize I have a Cassandra complex when these predictions come to pass.

Lower denominations could be phased out naturally

We once used $10cents coins, $25cents coins, and $50cents coins. Remember what happened to them when higher denominations increasingly got more accessible? People started rejecting them.

The same is likely to happen to the circulating $1 coins,$2 coins, and even $2 notes. When prices keep rising, as what’s currently happening, the physical amount of cash to carry to make payments increases. Lower denominations make you carry more physical amount of cash and higher denominations make you carry less.

To protect their pockets from getting torn or fatter with coins, people will likely start to shun lower denominations ($1 coins,$2 coins and $2 notes) in favour of higher denominations ($5, $10, and 20 notes).

Gradually, the lower denominations will be phased out and that, in itself, could trigger new cash shortages as the higher denominations won’t be enough in circulation. Its a vicious cycle!

Currency depreciation & Black market rate increase

As we pointed out before, the increase in the money supply will most likely depreciate the value of the Zim dollar. That means the rate of exchange of US dollars to Zim dollars will increase.

In other words, you will be given more Zim dollars for your US dollars than you are currently getting when the RBZ pours more money into the economy later this month. Or, you will need more Zim dollars to buy US dollars than the amount you are currently forking out.

Price increase

When the Zim dollar loses value, it follows that businesses will try to compensate this by increasing the prices of their goods and services. Economics tells us that a general price increase mostly affects people with fixed incomes.

Price controls

The default reaction by the government will likely be implementing price controls on businesses that will be called “rogue businesses” at that time.

Naturally, the retailers will respond by taking their stuff off their shelves, which will breed a black market. And in the black market, people will be paying goods and services at a premium with Zim dollars.

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