Premiums bite harder as cash shortages persist

WHILE premiums paid to access cash have dropped from the lofty levels of around 50 percent prior to the injection of additional cash in November last year, they remain high at 30 percent due to the acute shortage of cash.

This comes amid unconfirmed reports that the Reserve Bank of Zimbabwe (RBZ) is mulling to inject higher denominations of $10, $20 and $50 notes.

This might effectively deal with the chronic problem of cash shortages as well as challenges presented by high inflation.

Sources said in the near future, the central bank will start printing the money given that the higher denominations will require extra care to ensure that adequate security features are inserted on them.

Currently, notes are being imported. But there are fears that unrestrained cash injections, as was the case around 2008, will drive inflation.

However, Government and the central bank have allayed the fears. The RBZ is on record as saying that cash will be injected cautiously in line with market needs.

With the first batch of the new notes having been released onto the market late last year, unscrupulous dealers continue to milk desperate customers of their hard-earned money by charging steep premiums for cash.

The RBZ’s drip-feeding remains painstakingly slow.

Economic analysts believe that at the rate at which the cash is being injected into the economy, the country may fail to completely resolve its cash shortages this year.

The situation is being worsened by the fact that the targeted ideal amount of cash in circulation is a moving target

given that it is a percentage of total deposits, including foreign currency.

However, this target is shifting each time there is a movement in the exchange rate.

Harare economist Mr Brains Muchemwa noted that the quantum of cash relative to electronic balances remains disproportionately low at below 10 percent.

He said this is sustaining the punitive premiums on the sale of cash.

“On account of the prevalence of the informal sector and low confidence levels in the banking sector, physical cash as a percentage of electronic balances should be upwards of 25 percent in order to satisfy depositors’ requirements,” he said.

is also comes as parallel market activities such as foreign currency trading have continued to fuel irregular transfers of cash from banks and retail shops to illegal dealers, thereby worsening the prevailing cash shortages.

lndividuals’ demand for cash is driven by the informal markets’ discounted cash prices. Harare’s downtown tuckshops, for example, charge lower cash prices for most basic commodities.

Investigations established that the tuckshops are using this strategy to mop up cash and buy foreign currency on the black market.

Last week, the central bank said during 2019’s last quarter, it injected $150 million into the market. This money was expected to eliminate cash shortages and cash premiums.

“As per normal banking practice, these funds were sold to local banks for distribution to clients in exchange for RTGS balances, so as to neutralise any expansion of money supply and, therefore, inflation,” the RBZ said.

However, it seems like the bulk of that money found its way to cash barons as individuals in need of cash are still having to pay premiums to access it.

Economist Mr Eddie Cross said the central bank needs to inject more cash into the market. He believes that the country had a long way to go in eliminating the prevailing cash shortages.

“When the Monetary Policy Committee was formed in October last year, one of our first discussions was on cash. At the time, the premium on cash was about 50 percent. We authorised importation of $400 million cash in $2 and $5 notes.

“So far, $150 million has been released. We have been supplying the banks on demand. So the problem is that the banks have not taken up the entire $400 million,” said Mr Cross.

However, by mid-year, the RBZ intends to have injected new notes and coins worth $500 million.

For proper functionality, an economy requires cash in circulation of between 10 and 15 percent of the broad money supply.

Mr Cross said given that Zimbabwe’s markets are highly digitalised, 10 percent can suffice for the country’s needs.

The RBZ said as of now, there is $1,1 billion cash in circulation. This is against total bank deposits of $34,5 billion. Therefore, only 3,2 percent of the amount of money on the market is cash, which falls short of demand.

Authorities have indicated that their target is to increase cash in circulation to 10 percent of total deposits. Therefore, at least $3,4 billion cash is required at the moment to satisfy the current demand for cash.

Mr Cross revealed that at its next meeting, the RBZ’s Monetary Policy Committee will discuss ways of increasing cash in circulation with a view to ending shortages as well as the cash barons’ premiums.