Persistence Gwanyanya
WHILE it is undebatable that inflation is everywhere a monetary phenomenon, it may not always be the quantity of money but also its velocity that drives currency and price instability.
The velocity of money, which is the rate at which it changes hands, is a phenomenon that is often ignored by many analysts in Zimbabwe.
Yet factors such as low confidence in the Zimdollar can be a key driver of stability.
A reflection on the exchange rate and price developments in the last three months gives interesting insights into drivers of stability in Zimbabwe.
Monetary aggregates reveal that it was not the spike in money supply but the velocity of money that drove instability during that period.
As at June 6, 2023, when the Monetary Policy Committee (MPC) meeting was held, the level of usable balances in the economy stood at $214 billion, or US$42,8 million, at an exchange rate of US$1:$5 000.
These monetary aggregates imply that, with only US$42,8 million, it was possible to wipe away all Zimdollar usable balances in the economy.
Usable balances include excess RTGS balances, the money that is on the RTGS platform, and, therefore, readily usable for payments.
This amount has always been kept at around $0,1 billion, with any excess amount wiped into non-negotiable certificates of deposits (NNCDs), which we also included in our calculations of usable balances, as it is available for the bank’s clients in need.
The usable balances were against uncommitted bank deposits of US$448 million, which is approximately 32 percent of the total forex bank deposits of US$1,4 billion.
It is estimated that an additional US$2 billion-US$7 billion is circulating in the informal system, while an increasing amount of foreign currency is held in safe deposit boxes.
This can be interpreted to mean that, for every US$1 of usable Zimdollar, there was US$57 million-US$174 million uncommitted deposits in the banking system and circulating in the informal system.
As such, the level of US dollar relative to the Zimdollar is very high in Zimbabwe, which could also be a reflection of the high level of dollarisation — now estimated at 80 percent.
This brings us to the question of why then the Zimbabwe dollar was depreciating?
It is arguable that outside limited access to the available foreign currency in the formal system, the high velocity of money could have been the key driver of instability during the period.
If the $214 billion changes hands 10 times in a day, it has the same effect as $2,14 trillion, and if it changes hands 100 times, its effect is amplified to $21,4 trillion, and so on.
As such, no matter how much your usable balances, their effect on stability is amplified by the rate at which they are exchanged, which is influenced by many factors.
Key among these are confidence levels in the currency, and its extent of use and, therefore, demand.
As confidence in the local currency sank rock bottom, the market sought to offload it at every opportunity, making it “hot” money.
Attempts to calculate the time a Zimdollar deposit was held in the bank account before being offloaded only demonstrate increased concern about Zimdollar velocity.
It is common cause that, as the market seeks to offload the Zimdollar at every opportunity, its depreciation accelerates, escalating price increases. This drives money creation by banks, as well as increased Government borrowings, to accommodate currency depreciation and higher prices.
The 48 percent increase in Zimdollar money supply to $1,95 trillion as at June 30, from $1,32 trillion in March, can be interpreted as accommodative growth, and not the commonly held narrative of running the printing press to purchase the 25 percent surrender money to service external debt.
The excess amount that could have been created from this exercise was mopped up through NNCDs.
The amount in usable balances in the economy, as well as a low Zimdollar loan-to-deposit ratio of less than 40 percent, only demonstrate that the effect of the mechanism to purchase the 25 percent liquidation had limited effects on the money supply.
Now, following the implementation of stabilisation measures, the velocity of the Zimdollar is cooling off.
The recipient of the Zimdollar can afford to keep it for a longer period than before.
In fact, it made sense to keep the money in the local currency when the exchange rate was firming.
There are casualties who lost money by insisting in saving in forex as the best bet despite evidence to the contrary.
On the other hand, over the last three months, those who bet for the Zimdollar have made exchange gains.
What stabilisation measures — which essentially entail seeding the interbank market with forex to drive voluntary liquidation, tightening of Zimdollar liquidity and increasing demand for the Zimdollar by Government — have managed to do is reduce the velocity of the local unit.
As the velocity of the Zimdollar cools off, it has the opposite effect as its increasing velocity, as l demonstrated earlier.
With the current usable balance of $810 billion, a velocity of money of, say, five times has the same effect as usable balances of $4,05 trillion.
If velocity of money reduces to two times, the effect is reduced to $1,62 trillion and so on.
The concomitant effect of reduced velocity of money is lower Zimdollar money supply and stable exchange rate and inflation.
It is, therefore, unsurprising that both annual and month-on-month inflation have dropped to 101,3 percent and -15,3 percent, respectively, in July, from a peak of 175,8 percent and 74,5 percent the previous month.
Clearly, velocity of money is a function of confidence in a currency.
As such, there is need for the Reserve Bank of Zimbabwe (RBZ) and Treasury to redouble efforts to rebuild confidence in the financial service sector in general and the Zimdollar in particular.
There is need to debunk the common belief that Government will always print money with reckless abandon, especially to pay its creditors, mainly contractors. In fact, Treasury has now dealt with issues of lump sum payments to contractors by paying a greater portion of their invoices — up to 80 percent in some cases — in US dollars.
As they say, your reputation precedes you; if the stability holds for the next three to six months, we expect more confidence in the Zimdollar, which supports its durable stability.
It is prudent for the Government to underwrite the Zimdollar by continuing to widen its use, especially in taxes, duties, levies and fees payable to Government and its agents.
Even beyond the economy, confidence-building measures are important for the performance of our currency.
Persistence Gwanyanya is a member of the RBZ Monetary Policy Committee. He is also the founder of Bullion Group. He writes in his personal capacity
