The monetary system the world over, including in Zimbabwe, over has undergone a sea of change in the past century. From barter trade, a world without money, there have been many other means of exchange such as Asian cutlery, coins and notes, electronic transactions, mobile payments and now virtual currency.
Fiat currency, plastic money and negotiable instruments are all creations of the financial services sector and innovation that have taken global markets by storm.
Some countries are now slowly but surely moving away from cash. Indeed, some want drastic changes such as outlawing the use of cash! It may seem bizarre, but other countries are already implementing that in a big way.
For instance, in Britain cash is not accepted for bus tickets. France has outlawed cash transactions of over 1 000 euros. In the United States, possession of even reasonably large amounts of money is unusual and in some cases it can lead to forfeiture.
Zimbabwe is in that league, but for a totally different reason. People and companies are now largely using electronic transfers because of a chronic liquidity and cash crisis. Bank customers hardly use banks notes and coins. Payments in the economy are now dominated by electronic transfers with more than 96% of local transactions being conducted through plastic, internet and mobile money mainly due to cash shortages.It may seem innovative, but belies a crisis.
While authorities boast about it, the reality is that people’s daily experiences on financial matters demonstrate that plastic money has not been effective in addressing cash shortages. Of course, the Reserve Bank of Zimbabwe (RBZ) says it is dealing with this, but the problem has become rampant and crippling for the many and the economy.
The RBZ also says it will print cash for banks in exchange of their RTGS balances without changing money supply to maintain the current monetary base unchanged.
This sounds like a good intervention, but it is only a stop-gap measure, not a solution. The introduction of plastic money and other cashless forms of payment to alleviate the cash crisis was expected to reduce the demand for cash in the economy. However, this has not addressed the problem: cash shortages, sometimes queues whenever there is cash (queues have now disappeared not because of availability, but scarcity), and the black money market show the problem.
This has created distortions and arbitrage in the economy. There is now also a multiple pricing structure, the market’s natural response to a breakdown in the fungibility and substitutability of various forms of payment.
The recent ban on cash-in and cash-out transactions by authorities will only be transitory in reducing the cash-RTGS premium, but in the medium to long-term it will resurface given that the root causes of the problem remain unaddressed.