Zimbabweans rejects own currency as the nation re-dollarise.

In retrospect 2009, economic agents rejected the currency availed to them because they had no confidence in the RBZ’s bearer cheques.

They already anticipated prices to go up as usual and now they feared the state of the economy which was already suffering from the RBZ-caused hyperinflation of 2008.

Economic agents now had confidence in the stability of dollarization which culminated in the inevitable adoption of the multicurrency dispensation.

Confidence plays a vital role in business cycles and because of that a recovery without confidence is highly unlikely.

 The New Classical theory also says that if there is confidence in monetary policy, economic agents will expect the rise in price and cost inflation to be of short duration.

Higher prices will then not feed through to prices for other goods and to wages to the same extent, and there will be less risk of a recession.

Moreso, the recent 2014 resistance is also caused by lack of confidence in the RBZ’s monetary policy. Economic agents anticipate prices to go up as the RBZ continues to issue out bond coins.

This anticipation is also coupled with another anticipation of the re-introduction of the Zim Dollar ($Z) which is seen as a currency that has no value and can therefore drive back the economy to the widely read hyperinflation of 2008.

Although the central bank and ministry of finance have install monetary and fiscal measures to stabilize the economy from time to time this has been rendered ineffective as the Zimbabwean dollar continue to lose its value weekly.

In a bid to try to slow down the hyperinflation the Reserve Bank of Zimbabwe (RBZ)’s Monetary Policy Committee made several key and very interesting decisions with regards money supply growth bit to no avail.

Last month April 2022 the MPC meeting was held on the backdrop of rising inflation. At that time annual inflation had been recorded at 72.7 percent for the month of March.

The rise in inflation was blamed on a loose monetary policy inconsistency which change every agricultural season especially when tobacco selling seasons starts 

Although some of the rising prices being experienced locally are a result of global price increases, inflation is always seen as a monetary phenomenon hence the RBZ’s decisions.

And to curtail money supply growth, the central bank following deliberations of the MPC, decided to put up interest rates.

The Bank Policy rate was increased from 60 percent to 80 percent. The mid-term accommodation facility interest rate was also put up from 40 percent to 50 percent.

Higher rates make money costlier and borrowing less appealing. That, in turn, slows demand. Less demand means merchants will be under pressure to cut prices to lure people to buy their products.

Another decision by the MPC was to reduce reserve money supply quarterly growth target from 7.5 percent to 5 percent. This would mean less money to chase goods and services in the economy.

Further, the MPC revised upwards the minimum deposit rates for ZW$ savings and time deposits from 10 percent and 20 percent per annum to 12.5 percent and 25 percent, respectively. Such a move is meant to encourage people to keep money in the bank a little bit longer and not rush to demand goods and services.

Expectations are that these measures apart from slowing down inflation will take a little bit of steam out of the equity market.

Indeed the central bank said it was “focused on inflation reduction and putting in place additional policy measures in response to the resurging inflationary pressures and foreign exchange parallel market activities.”

Unfortunately for the RBZ and indeed the economy, the measures seem to be failing. Instead of slowing down, inflation sky rocketed in April. Annual inflation came out at 96.4 percent, up from 72,7 percent in March. Month-on-month inflation was 15,5 percent, up from 6,3 percent in March. It might be early days to say the latest policy measures are failing, but all the same the signs are not looking good.

To give the central bank’s measures the benefit of doubt we could say inflation being experienced in Zimbabwe is not always a monetary phenomenon. There’s a psychological factor in the equation and inflation is now a self-fulfilling prophecy.

When the public thinks the cost of living will be higher, they adjust their behaviour accordingly. Businesses boost the prices they charge and workers demand better wages.

This has the potential to drive inflation even higher. Post the measures, the Zimbabwe dollar has depreciated even faster on both the official and parallel market.

Officially, the local currency has been shedding value by $4 every week. On the parallel market, the local dollar is changing hands at $380-$400 having started the month at $300. Again this make it seem like the latest measures are not working.

Given the measures, expectations were that it would result in a decline in valuations for a stock market that has thus far held up fairly well in the face of soaring inflation.

But just like inflation the opposite is happening. While the MPC focused on reducing money supply, much more money is finding way to the market.

Between Monday and Tuesday this week, approximately $5,6 billion had found its way to the market. That’s 14 percent of Reserve Money supply sitting at $28 billion.

At the start of the month, the ZSE’s market capitalisation was $2 trillion, but has since skyrocketed to $3, 6 trillion. Probably out of fear of being blamed for fueling inflation the ZSE has since adjusted its circuit breakers for big counters from 20 percent to 15 percent. This means share prices for these big stocks cannot go up by more than 15 percent.

For small cap counters the circuit breaker has been adjusted to 20 percent from 100 percent. This means prices of such stocks cannot go up by more than 20 percent per day. What this has essentially done is to take away one key factor that was making the ZSE attractive.

The ability to beat inflation and currency depreciation. Fifty percent per day is however still reasonable and attractive. Given the amount of money finding its way to the market, $5,6 billion, the rally is being fuelled by real demand.

Real demand is when the readiness to satisfy a want “is backed up by the individual’s ability and willingness to pay.” However, given the measures by the central bank, this was not expected.

Under normal circumstances you would expect inflation to slow, the stock market to come off and the exchange rate to stabilize.

What it means then is that whatever the country is experiencing is beyond the central bank’s monetary policy instruments.

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