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Somehow, RBZ still to be convinced more money in economy leads to inflation

If you were in a coma the whole of 2021, just know you didn’t miss out on anything. It was a garbage year, globally. Zimbabwe was no exception. Near the end of the year we found out that the average rural family earns about US$75 a month and that 83% of urbanites are struggling to buy mealie-meal and cooking oil.

All around depressing news as the economy continued to struggle. However, like with (almost?) all dark clouds, a silver lining can be found if you look hard enough. It was a tough year but like some wise man once said, it could have been worse. Way worse.


The silver lining had to do with inflation. It wasn’t as bad as we thought it was going to be. Before you stone me, I know, prices were steadily rising. We had a high inflation rate but it wasn’t quite hyperinflation.

For it to be considered hyperinflation, monthly inflation rate has to exceed about 50%. The highest month on month inflation we saw in 2021 was only 6.4%. Not even close to being called hyperinflation. However, the 6% is much too much when we consider that the prices were already out of our reach, after having risen sharply in the near-hyperinflation of 2020. Mid 2020 saw monthly rates of around 35%.

That gives context. In Zimbabwe, any year that we don’t experience hyperinflation is a win since we always seem to be just a bad night’s sleep away from extreme inflation.

It does seem curious to celebrate having the sixth highest inflation in the world. However, when you have an annual rate of 61% compared to Venezuela’s 686%, you are allowed to let out a little ‘yay.’ The 61% should be contrasted with the 349% we closed out 2020 with. That’s when the barely audible ‘yay’ comes out.

In 2020 we got perilously close to utter chaos. How did we turn it around on the inflation front in 2021?

Reducing growth of money supply

We looked at what the Reserve Bank (RBZ) did to remove excess money from the economy. You can read all about that here.

In short though, the RBZ set out to remove excess liquidity in the market. Meaning they removed some money from circulation. The overall reserve money did increase from the balances at the beginning of the year. However, the closing balance represented a reasonable 27% growth in reserve money.

What is this reserve money?

Simply put, this refers to all the money in Zimbabwe. The Zimdollars at least. RBZ estimates place the reserve money balance as at 31 December 2021 at ZW$24.36 billion. 

  • Banks’ RTGS liquidity – 41%
  • Statutory reserves – 39%
  • Issued currency – 20%

Banks’ RTGS liquidity represents the funds banks can play around with. They can loan this out or in Zim banks’ case, just watch the balance swell. 

Statutory reserves represent the minimum amount banks have to maintain in their accounts in order to serve their customers. Just in case those pesky depositors need some of their money from the banks, the central bank makes sure the banks are always able to meet this need. This statutory reserve cannot be loaned out and so facilitates the day to day financial needs of the banked population.

Issued currency are the physical notes (and coins?) that are in circulation. Those are the notes we mistakenly call bond notes.

RBZ learning on the job?

Fresh from their governor being named one of the worst central bank bosses in the world, the RBZ is at it again. Everything we just discussed above is, or should be second nature to the folks at our esteemed apex bank. 

You would expect the folks at the institution to whom ‘managing reserve money’ is part of the day to day, to know the implications. Surely, they must understand what a growing money reserve could mean in the economy. After all, it is the same RBZ that was mopping up excess money in the economy to such good results. 

More money = inflation?

Well, the following quote does not inspire confidence,

“The excess liquidity mopping exercise, through open market operations, coupled with foreign exchange sales at the auction suggests that there is a co-movement between reserve money growth and inflation, which justifies the use, by the Bank, of the monetary targeting framework, among other instruments”


Someone at the RBZ thinks they are discovering something truly mind blowing. To them, the mopping exercise suggests a relationship between growth in money in the economy and inflation. My goodness. 

They are not even rock solid sure that the relationship exists. Apparently they still have to punch the data in and let the supercomputer determine once and for all if more money = inflation. 

With all the jargon, the quote sounds impressive. But when you understand the jargon you are just left wondering why someone would seriously be telling you about data that suggests more money chasing few goods would lead to inflation. Even primary school kids know this.

So did the RBZ just wing it when they mopped up excess liquidity? Did they close their eyes and hope for the best? Or are they playing some games in pretending to sound stately whilst spewing nonsense, knowing full well there are no nuggets in their drivel? Either way, it does not fill me with confidence.

At least they are acting in faith

What I love about the RBZ is that they did not wait for conclusive evidence that reducing liquidity would help reduce inflation. They acted and it helped slow the inflation. In 2022 they are proceeding with other money tightening measures. We were promised that they will be keeping a watchful eye over the money supply. Their data may be inconclusive but I believe that will help tame inflation.

Only problem is that the govt may inadvertently be working against that goal. We shall look how govt plans to boost economic growth in 2022 will most likely bite us where it hurts later.

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7 thoughts on “Somehow, RBZ still to be convinced more money in economy leads to inflation

  1. RBZ will churn out as much zpf tell them to! They need all of that to pay off those “pensions” given to “war veterans”, as well as finance their extravagant lifestyles, without having to raid their own greenback piggy-banks! That’s something which won’t change, so don’t expect ANY improvement from the very same lot who got Zimbabwe into that mess over the decades. The million, billion and trillion notes will return soon, or a whole bunch of zeros will be lopped off, followed by another, until BANG!… Everything implodes… Yet again!

  2. Nhai Leonard how do you put more money if there’s absolutely nothing to back it’s value??
    Isn’t it that inflation is an increase in the quantity of money, leading to a devaluation of existing money?
    As long as our manufacturing and processing is close to zero, what’s the point of putting more of the valueless money

  3. Well. Let me just say that the RBZ doesn’t know what it is doing. We are suffering in this country because of bad economics. I thought you guys had degrees. Why is this happening is you consider yourselves professionals. Give the boy a chance and let him takeover. He might change things and stop us from going overseas.
    #ngaapinde hake mukomana

  4. That dooshbag Chamisa won’t usher a better Zim with his hooligan supporters who were famous for ditching school back in their days, it is far much better to leave Zim in the hands of this current dictatorship at least they are benefiting from their hard earned labour not to mention many of their cadres who died so that they can enjoy the lavish life they are living now. I always ask who in MDC rank is willing to die for what they believe in 🤗🤗🤗 Viva ZANU ( Zanu ndeyeropa…)

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