The other side of introducing the $50 banknote

THE Reserve Bank of Zimbabwe has embarked on a number of monetary reforms, in line with the Transitional Stabilisation Programme (TSP), which include the reintroduction of the Zim dollar (ZW$).

Their next move is to introduce higher denominations up to a ZW$50 note. This is a significant step for the economy at large and the monetary system in particular.

From what we know about the laws of monetary policy and inflation, in particular, an increase in money supply without a simultaneous increase in national output results in inflationary pressure on a currency as more money, in this case, means more resources chasing after the same amount of goods resulting in an increase in the general price level (a phenomenon economists call demand-pull inflation). Ultimately the result is an erosion of the citizens’ real income as the currency loses value.

Therefore, the rationale behind limiting the local currency to single digit bills was a means of limiting money supply in order to suppress inflation which had plagued the local currency. To a certain extent this measure worked to slow inflation levels by keeping denominations low. This is because the RBZ was limiting money supply.

Introducing a new $ZW50 note may seem logical to those of us tired of carrying wads of money. To these individuals a new $50 bill is a good solution to an inconvenient problem. A $50 note is ten times the highest denomination currently in circulation, the ZW$5 note. This, therefore, represents an increase in money supply. As we know an increase in money supply without the simultaneous increases in national output causes inflationary pressure on the economy. Perhaps a new bank note should not mark a huge gap from the highest denomination we have at present.

In 2019 the Gross domestic product (GDP), a measure of economic activity or national output, of Zimbabwe fell by 6,9%, this means that the economy or national output declined.

To increase money supply when output is declining, as in our case will have adverse effects on the value of the ZW$ which is currently trading close to the Rand on local exchange markets. A smaller economy and more money may be a disaster for the local currency and cause inflationary shock that will be felt through the country.

A number of options are available to the RBZ to maintain the ZW$ as a viable currency. The RBZ would have to prioritise stability. To achieve monetary stability the RBZ would require a more restrictive monetary policy that would limit money supply.

This would have to be accompanied by higher interest rates to discourage spending and encourage saving, this will also make investment by firms more profitable. However, these are piece-meal adjustment to establish stability, in the long-term Zimbabwe must prioritise increasing its GDP.

An increase in output of the economy may have a stabilising effect on the local currency as well as possible deflationary effect which would increase the value of the ZW$ as more goods are produced relative to money stock (amount of ZW$ available in the economy).

To increase national output requires sound investment in manufacturing, agriculture and other key industries. The Government may achieve this by subsidising these key industries.

These subsidies need not be in the form of direct financial assistances. For instance the Government may further reduce tax, or even eliminate it temporarily, in key industries and offer more technical support as a form of subsidy. Reducing tax rates will not result in lower tax revenue as long as production/ output increases at a rate higher than the tax reduction. In fact tax revenue may increase if growth in production exceeds the percentage reduction in tax.

In conclusion, a stable ZW$ is imperative for the economy and it is absolutely necessary to ensure sound economic growth, hence my opposition to a new ZW$50 note as it can only worsen inflation. I also prescribe for higher interest rates to discourage spending and improve savings rates. The RBZ, through such measures will inspire confidence in the local currency, which is very important.

The state’s policy of raising money from private sector taxation would earn them more revenue if they expand the private sector’s value and output, to achieve this the state should take an approach that treats firms like children of the economy.

As children, their growth must be encouraged by a less stifling tax regime to allow them to expand, in the long-run the state would earn more revenue from taxing a larger private sector.

The writer, Kabelo Sithole is studying Economics at the Midlands State University.