We need to formalise economy, increase production: RBZ

Source: We need to formalise economy, increase production: RBZ | Herald (Business)

Golden Sibanda Senior Business Reporter
The Reserve Bank of Zimbabwe has admitted chances are high that new notes and coins will find their way onto the informal sector. When the cash is traded illegally it may not return into the formal banking system because the domestic economy is about 60 percent informal.

The country’s economy has been heavily informalised in the past two decades, becoming more like a dual enclave, as Zimbabwe went through severe economic challenges that saw major formal businesses closing shop or relocating, decimating nearly half its size.

In fact, Zimbabwe has the second largest informal economy as a percentage of its total economy in the world, after Bolivia, according to the International Monetary Fund (IMF).

Activities of shadow economies are hidden from authorities for various reasons which include regulatory, monetary and institutional, the Bretton Woods financial institution said.

In Zimbabwe, the economic challenges of the past two decades have created complex informal economic systems that have resulted in cash increasingly becoming a scarce commodity, especially in light of acute shortages across the economy.

As such, shadowy means are used to get cash from any source, including large stashes directly from the banking sector through corrupt bank officials, on to the informal market where it is sold at steep premiums or used to trade in other currencies.

Recent efforts which saw temporary closure of mobile money agents thought to be fuelling the practice and reduction of the value of money allowed per transaction on such platforms have not deterred the dealers although the injection of new notes and coins last week has seen the premium rates softening markedly.

Cash has also become a precious commodity given that amid its acute shortage in the country, paying for goods and services using either notes or coins is considerably cheaper compared to when using RTGS or electronic money, especially after the country dumped the multicurrency for local currency amid a dollar crunch.

RBZ governor Dr John Mangudya said in an interview with our sister paper Business Weekly that there was need for deliberate efforts to increase production in the economy and formalise most business activities in the country to beat the proliferation of a lot of economic vices.

Zimbabwe had more than 50 percent of its economy decimated by nearly a decade of economic meltdown to 2008 and while it posted some recovery from 2009 to 2012, the economy has sauntered for the most part over that period and in the process this has given giving birth to a proliferation of shadowy informal sector activities.

The central bank chief said this as the apex bank started dispensing new $2 and $5 Zimbabwe dollars notes as well as $2 denominations of bond coins to address the problem of acute shortage of cash.

The shortage of cash has seen desperate cash seekers being charged premiums of up to 50 percent just to get cash they need mostly for transport fares, but also buying goods, which are cheaper when using cash.

To that end, the central bank has said it will increase the amount of cash in circulation through new bank notes and coins, which will circulate alongside and interchangeably at the same value as the old bond notes and coins in $1, $2 and $5 denominations.

“This economy is more like a dual economy now, it has an informal sector, which is about 60 percent and the formal sector, which is about 40 percent. What is happening is that money comes from the formal to informal sector and gets trapped there,” Dr Mangudya said.

If this happens, it would defeat authorities’ objective of ending the cash shortage and charging of premiums on desperate citizens already bearing the brunt of the economic challenges.

“We need to make sure that the economy is formalised; we need to increase production so that we increase the circle of the formal sector. Informality of the economy is a national problem; that is what is called structural challenges in the economy.

“So, the Reserve Bank of Zimbabwe is going to deal with those structural challenges by increasing productivity, to increase production in the formal sector and keep on giving them (banks) cash until there is equilibrium,” he said.

Currently, bank customers are allowed to withdraw a maximum of $300 per week, but the amount remains far little to meet daily requirements of citizens in an environment where inflation is believed to have exceeded the 175,6 percent rate last reported for June before Treasury suspended production of the figures until February next year.

This came after currency reforms that saw the country reintroduce local currency in February this year and switched to exclusive domestic mono-currency system in June, from multicurrency since 2009.

Treasury believes that after a 12-month cycle to February 2029 and computation of figures based on same currency, the inflation trends will give a more accurate picture of the inflation dynamics in the country over given periods.

The RBZ is gradually targeting increasing the amount of cash in circulation to 10 percent of the total money supply, which currently stands at about $19 billion, but the targeted threshold remains far lower than global levels.

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