There is no denying the fact that the value of the Zimbabwean dollar has firmed against the US dollar and other popular currencies. When August began the rate was around $950 as to 1 USD. Now, most street dealers are only paying $700 ZWL if you are lucky and around $650 ZWL per 1 USD for the general populace. So why is the Zimbabwean dollar gaining value? Is it because it is in short supply as some have been claiming? Is it because of Gold Coins which were introduced back about the same time it started gaining value? Why has the Zimbabwean dollar gained in value?

A popular Economist, Tinashe Murapata, with a large following on Twitter has provided some insight into what may be happening and his answer is simple. There is a Zimbabwean dollar “liquidity crunch” which has driven down rates. He was at pains to point out that the Zimbabwean dollar is not in short supply as some have suggested:

Money supply has been increasing & NOT decreasing. Liquidity shortages is NOT money supply.

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Tinashe Murapata on Twitter

In other words, there is a liquidity shortage of Zimbabwean dollars in the economy brought about by a sudden withdrawal of vast sums of ZWL. The country’s money overall money supply is still increasing albeit at a lower rate. The Zimbabwean dollar is firming up and the rate has fallen because there is a decreased amount of Zimbabwean dollars actively participating in the active market.

A good analogy is that the government has closed the floodgates of a dam or lake filled with ZWL. They can quickly and easily do this because most of the ZWL in circulation in Zimbabwe is in electronic form so it is easier to exert control on the biggest RTGS balances. When floodgates are closed it means there is less water downstream even if the level of the water in the dam is still rising upstream. When observed from the position of someone downstream it might even look like the entire river has dried up.

Money supply is increasing at an increasing rate. A perfect setting for a crush ahead.

In less than 2 months the PMR has eased from 850 to 750. ZWL has strengthened by 12%.

The Fx auction rate has declined from 391 to 604. A 35% depreciation.

Tinashe Murapata on Twitter.

To be clear data published by the RBZ and other official sources confirm that the money supply is increasing and not decreasing as claimed by some. Given their total amount, it is also not feasible to attribute the ongoing liquidity crunch to Gold Coins. It is more likely that the freeze on payments to contractors has resulted in a slowdown in the overall money supply in the economy. The government itself has publicly accused contractors of fuelling activity and negative rate sentiment on the black market.

The thing is in the real world you can only close floodgates for so long without the dam bursting if water continues to flow into it. It remains to be seen if the government can maintain a tight grip on the money supply. A better solution would be to curtail excessive public spending by finding alternative ways to finance the big projects that are largely responsible for fuelling money growth.