100 days of bond notes

Persistence Gwanyanya
THE Confederation of Zimbabwe Retailers held a breakfast meeting on the March 23, 2017 to review how bond notes have fared in the prior 100 days.

I was part of the panelists who included RBZ Deputy Governor Dr Kupukile Mhlambo, and Professor Ashok Chakravarti, who is a Senior Consultant in the Office of the President and Cabinet.

There was consensus from the panelists, as well as the attendees, that bond notes have so far worked to the satisfaction of many, even though parallel market activities are threatening to destabilise the currency regime.

Importantly, it was agreed bond notes are only a transitional measure, not permanent solution to the country’s cash crisis.

However, unlike many who believe the wide use of the US dollar is the root cause of the country’s economic challenges and are thus advocating for the adoption of the rand, I am of the view that the unbalanced state of the economy and limited ability to attract and retain capital are the key challenges facing Zimbabwe’s economy today.

As such, the solutions lies in rebalancing the economy towards increased production and exports whilst at the same time slashing consumption and imports.

These efforts should be complemented by measures to attract and retain capital. When the RBZ announced its intention to introduce bond notes as part of measures to deal with cash shortages on May 4, 2016, the market was skeptical.

It viewed the move as a deliberate ploy to reintroduce the Zimbabwe dollar.

As such, it was very difficult for the RBZ to sell the idea due to the broken trust between the RBZ and the market.

It is not surprising that it took the central bank more than six months to introduce the surrogate currency.

Evidently, RBZ was overly cautious and wanted to avoid failure as this could have spelt doom to the whole economy.

Today, it’s only fair to give credit to the RBZ for the project. What is working well so far?

The successful introduction of bond notes was made possible by the measured way in which the currency was introduced.

Bond notes continue to be tied to exports so as to minimise the occurrence of inflation. So far, only US$102 million bond notes have been injected into the economy from exports accrued since May 4, 2016 when the export incentive scheme was unveiled.

Bond notes, together with other transactional platforms such electronic and mobile money, have seemingly cash shortages less prevalent than they ought to have been. RBZ statistics show electronic transactions increased from US$7 billion in 2009 to US$57 billion by end of 2015, as the market gets accustomed to using electronic money.

The surrogate currency is largely trading at par with the US dollar.

However, the parallel market and a three-tier pricing system —for US dollar, bond notes and POS transactions — are beginning to emerge.

But the availability of the surrogate currency in small denominations has helped contain parallel market trade.

The sheer amount of bond notes than need to be traded for one to start making meaningful profits makes this business uneconomical.

For instance, a forex dealer requires at least 2 000 bond notes to trade only US$10 000 for an average spread of US$100. This amount of bond notes requires a sizeable purse to carry around.

The same reason has also discouraged unscrupulous elements from counterfeiting the surrogate currency.

Most importantly, the distribution of bond notes among banks is well managed such that even those with limited exports are receiving a decent share.

It is, however, not without its shortfalls as a currency solution in Zimbabwe today.

An appreciation of the root cause of cash shortages is an ideal starting point to addressing the challenges. As highlighted earlier, there seems to be divergence of views on this subject.

On one hand, there are some who think Zimbabwe’s cash shortages lie in the unbalanced state of the economy.

On the other hand, there are those who believe the usage of a strong currency is the major problem. Professor Ashok Chakravarti is the major sponsor of the latter view.

The Bankers Association of Zimbabwe and Consumer Council of Zimbabwe are also converts of the same view.

They believe the country will become more competitive by merely changing the name of the local currency — from dollar to rand.

Their preference for the rand is also based on the fact it is non-externalisable, unlike the US dollar, which is attractive globally as a reserve currency.

But they seem not to consider the fact that the market has high preference for the rand to the US dollar.

Any forced conversion at a devalued dollar-rand exchange rate would have enormous repercussions which will lead to litigations.

Savings, pensions, and cor­porate balance sheets would need to be similarly devalued, though in a less catastrophic way to dollarisation in 2008/ 9.

My view is that switching to the rand is not a short-term solution.

Unless the rand fell steeply, the country will remain hugely uncompetitive because of deep-seated structural chal­lenges that have made it diffi­cult to rebalance the economy. As such, the faltering economy can be traced to the unbal­anced state of the economy. This imbalance is reflected by high levels of consumption and imports against low production and exports levels.

Production constraints in Zimbabwe largely reflect the existence of deep-seated struc­tural challenges.

Poor infrastructure, high cost and unreliability of util­ities, scarcity and high cost of capital, antiquated machinery and obsolete technology are some of the challenges affect­ing the local industry.

Given the low levels of pro­duction, the high consump­tion levels in Zimbabwe have resulted in increased reliance on imports. This economic imbalance has conspired with the country’s inability to attract and retain both local and foreign capital to produce the undesirable state of an fal­tering economy in stress.

Limited capital inflows can be traced to poor investment policies as demonstrated by the country’s low ranking in the World Bank Ease of Doing Business Index.

Equally, the poor investment policies and market indisci­pline has resulted in undesir­able levels of capital flight.

The RBZ reported that in 2015 alone, the country lost about US$2 billion through external­isation.

Efficacy of bond notes

Admittedly, bond notes have been less potent in curtailing externalisation.

As long as influence-ped­dlers who have the ability to access the US dollar and cart it across the border loom large on the economy, prospects to sig­nificantly cut smuggling will remain dim.

No wonder an US$600 mil­lion is reportedly sitting in off­shore accounts when the coun­try is in dire need of capital to rebuild.

There is need for the country to exorcise the demon of cor­ruption, which is something that can not be done by bond notes.

Whilst the non-externalis­able argument by rand pro­tagonists sound sensible, it is important to understand that sound investment policies are a precondition to attract and retain capital.

That is why externalisation is not a major problem in Zam­bia, which has more US dollars in circulation than Zimbabwe.

The DRC and Mozambique use both US dollars and their own local currencies but exter­nalisation remains low.

It is important to recognise that bond notes were intro­duced as an export incentive.

Being a commodity-depend­ent economy — with more than 80 percent of her export revenue contributed by gold, tobacco, platinum, chrome and diamonds — the incen­tive made sense to Zimbabwe in view of easing commodity prices.

Evidently, the export incen­tive scheme alone has been less potent to boost exports.

The country’s export levels remained depressed at US$3,4 billion in 2016, which is a seven percent decline from US$3,4 billion a year earlier.

This, coupled with high lev­els of imports at US$5,4 billion (2015: US$6,1 billion) resulted in trade deficit of US$2 billion (2015: US$2,5 billion).

This has seen nostro fund­ing challenges deepen, with foreign payment backlog at other banks reported to go as far back as a year.

Arguably, this has ignited the parallel market for currencies and the return of Old Mutual Implied Rate since September 2016.

As pointed out earlier, boost­ing the country’s production and productivity largely depen­dends on addressing real issues relating to infrastructure defi­cit, antiquated machinery and obsolete technology, scarcity and high cost of capital among others.

The sheer amount of capital required to cover the infra­structure gap of US$14-20 bil­lion, together with an esti­mated US$5 billion needed to reindustrialise the coun­try, calls for sound policies to attract an retain both domestic and foreign capital.

This makes the implementa­tion of ease of doing business reforms more urgent. It’s quite comforting that some notable progress is being registered in that front.

Bond notes can only do so much. Unlike what many think, bond notes can not solve all the country’s economic ills.

Those charged with the responsibility of growing the economy and formulating pol­icies should also step up.

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