RBZ will avoid Gedion Gono’s mistake by simply increasing cash supply, not money supply – Eddie Cross

New Zim dollar notes

Monetary Policy Committee member, Eddie Cross has clarified Reserve Bank of Zimbabwe’s policy with respect to the injection of new notes into the economy.

Mr Cross said that, inorder to avoid Zim dollar depreciation and triggering inflation, RBZ is not increasing the money supply as it introduces new Zim dollar notes.

Rather, its only increasing the cash supply and leave the money supply as it was before the new $10 and $20 notes. This is being done by swapping existing RTGS electronic balances with the new cash notes.

That means banks will have to first remit RTGS electronic balances to RBZ and,in return, RBZ will release new notes to them. Here’s the full statement by Eddie Cross:

If there is an increase in the amount of money in circulation, as was happening during the Gideon Gono era, then there is direct relationship between money supply, exchange rate and the inflation

But the only way to prevent the increase in base money (total money supply) with new cash in the market and the impact on the exchange rate is for the banks to acquire these notes using their RTGS dollar balances.

What we are doing is that we are swapping existing RTGS cash for cash in another form and so there is no impact on money supply and if we maintain that everything should be fine.

In normal circumstances, increasing cash supply without increasing money supply should not lead to a further loss of value of the Zimbabwe dollar nor trigger inflation.

However,a deep seated mistrust of the RBZ by the public has given birth to speculation that the central bank is actually increasing money supply and not merely increasing cash supply.

As a result, the black market has swiftly reacted by increasing the exchange rate of US Dollars to Zim dollars to at least ZWL$53. Business will likely increase their prices to neutralize this loss of value of the Zimbabwe dollar against the US dollar and,as a result, this will lead to an increase in inflation.

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