Pros, cons of new cash injection into the economy

Source: Pros, cons of new cash injection into the economy | The Herald November 6, 2019

Tafadzwa Bandama Features Correspondent

In its inaugural Press statement, the Monetary Policy Committee noted that the level of physical cash in the economy is inadequate to meet transactional demand.

This is because the current proportion of cash to broad money supply of 4 percent is low compared to regional and international levels of 10-15 percent.

This low ratio has resulted in an undesirable cash premium which the committee would like to see eliminated.

The committee highlighted that there was need to boost the domestic availability of cash for transactional purposes through a gradual increase in cash supply over the next six months. Incrementalism will enable authorities to monitor the impact of cash injection in the economy as they keep an eye on money supply levels.

What does this mean?

The authorities are injecting new physical cash as opposed to new currency.

This will be in exchange for existing electronic money balances, not new money.

As we all know, most of the money that is in the economy is in electronic form.

By exchanging physical notes for electronic money, there is no increase in money supply. Economic agents will be able to withdraw cash from their banks as long as there are matching RTGS balances.

The RBZ, however, may review withdrawal limits so that individuals cannot withdraw disproportionately large amounts of cash that fuel speculative tendencies and destabilise the system.

The pros of the new cash injections

There are far more pros than cons. The pros include the following:

1. Reduced inflationary pressures as cash has a far slower velocity of circulation than electronic money.

Think about sending money to Masvingo, if you send by mobile money transfer, how long does it take to get to Masvingo?

If you send cash, how long does it take?

This fact means that cash is much less inflationary than electronic money.

2. Improved productivity by elimination of the long queues for cash.

A lot of productive time is wasted by people queuing for cash, adequate cash will eliminate this waste.

3. Reduced distortions as the cash and RTGS rates of foreign exchange converge.

This will help reduce or eliminate the multi-tier pricing system that is currently prevailing in the economy.

4. Cash can be a backup when electronic payment systems fail.

The cons

While cash is good for oiling transactions, a high cash economy is fertile ground for breeding money laundering activities because there is no audit trail for underhand dealings.

Electronic transactions are traceable. Since the Government is levying a 2 percent IMTT on electronic transactions, the increased notes and coins may reduce Government revenue from the IMTT revenue stream.

It is the poor who are most hurt by the shortage of physical cash in the economy, thus negating the ethos of growth with inclusion.

Implications for industry

The injection of more physical cash in the economy reduces adverse expectations because the injection of more notes and coins to replace existing RTGS balances minimises distortions that are prevalent in the economy.

More notes and coins will reduce distortions in the money and foreign currency markets, especially with the situation obtaining on the ground where money is now a commodity.

Thus, adverse expectations on inflation will take a knock.

The injection of more notes and coins will minimise the significance of the multi-tier pricing system and ensuing price uniformity makes it relatively easier for business planning.

Communication caveat

Judging by conversations in the public arena, this information should be communicated in all the country’s 16 official languages which are Chewa, Chibarwe, English, Kalanga, Koisan, Nambya, Ndau, Ndebele, Shangani, Shona, sign language, Sotho, Tonga, Tswana, Venda, and Xhosa so that everyone is brought up to speed with the developments in the money market.

Misinterpretation of a policy pronouncement may have negative implications on the economy as economic agents take positions to safeguard their interests.

People need to be brought on board by communicating in a language that they understand better because they have a keen interest on economic developments since this affects bread and butter issues.

This is evidently so as economic agents have lost savings twice in a decade due to policy changes.

Tafadzwa Bandama is the chief economist at Confederation of Zimbabwe Industries (CZI). The views expressed here are her own.