eBusiness Weekly
Tawanda Musarurwa
The level of money circulating in the economy declined in the first quarter of the year as strategies put in place by the Reserve Bank of Zimbabwe to curb excess liquidity began to take effect.
Financial experts say when too much money is in circulation then the supply of money is greater than the demand and the money tends to lose its value (read “inflation”).
“Reserve money fell, largely due to mopping of excess liquidity through the issuance of the Savings Bonds,” said central bank governor Dr John Mangudya in his first quarterly economic review of 2018.
Reserve money holds a critical position in monetary policy. And to the extent that it is mostly currency in circulation with the people, reserve money decides the level of liquidity and price level in the economy.
Economists say the management of reserve money is thus very important to manage liquidity and price level.
Local financial expert Joseph Mverecha says excess liquidity has negative consequences on the functioning of the economy.
“The economy requires liquidity to function properly. Liquidity is to the economy what oil is to the engine of a vehicle. But just as too much oil is not good for a car, too much liquidity is not good for the economy.
“Liquidity by itself does not create value, but assigns a value to output. Production, though aided by liquidity, is really a function of supply side factors — our investment in capital, technology, labour and of course also availability of foreign exchange. These are the key determinants of production, output and value addition,” he said.
“Too much liquidity often translates into asset price bubbles, with visceral effects on the economy — these may include property, vehicles or even foreign exchange, as economic agents seek to hedge against loss of value.”
It is to this extent that Dr Mangudya announced in the last year’s Monetary Policy Statement the introduction of a savings bond, one of whose key functions was to counter the effects of increased money supply.
Earlier in June Dr Mangudya told this publication that the central bank had raised over $1 billion through the issuance of the savings bonds.
Meanwhile, the RBZ figures also show that broad money supply in the country during Q1 recorded a decline of 1, 49 percent to $7,98 billion from $8, 10 billion recorded in the fourth quarter of 2017.
Broad money, or money supply, is the totality of assets that households and businesses can use to make payments or to hold as short-term investments such as currency, funds in bank accounts and anything of value resembling money.
“The decrease was on the back of a 3, 60 percent decline in transferable deposits. Partially offsetting the decrease, were quarterly increases of 12, 64 percent, 6, 37 percent and 2, 61 percent in negotiable certificates of deposits, time deposits and bond notes and coins in circulation, respectively,” said the apex bank.
“The decline in money supply growth reflected a quarter-on-quarter decline in reserve money of 12, 99 percent, from $2, 6 billion in December 2017 to $2, 3 billion in March 2018.”
