The Sunday Mail
Brains Muchemwa
The debate on bond notes went into overdrive last week, culminating in a massively subscribed Zimbabwe National Chamber of Commerce breakfast meeting that eventually turned into a half-day session.
The session was an honest engagement between policy-makers and business.
Among other important aspects, the Reserve Bank of Zimbabwe made a fundamental clarification that bond notes were primarily an export incentive and not a cash shortage antidote.
And as RBZ public relations machine goes into overdrive, it is important for the matter to be made much clearer, moreso in Government circles.
Rebutting a cash shortage with bond notes implies, to some extent, that the supply of such notes would be dictated by cash withdrawals from the banking sector, meaning the market would quickly be awash with bond notes.
With Government’s monthly wage bill estimated at US$230 million, that would also imply that one month’s payroll would wipe out the US$200 million bond notes.
It becomes important that the clarification about bond notes being an export incentive be well communicated and understood. That incentive and with the RBZ sticking to its promise to issue the notes, the story becomes a totally different ball game.
Exports, which peaked in 2012 at US$3,9 billion, have been coming off year-on-year since then to US$2,7 billion in 2015.
That is bad for this economy. So, the incentive could not have come at a better time. Considering that exports are generally spread across the whole year, the injection of bond notes, as long as they remain an export incentive, will be equally spread.
Assuming exports stagnate around the same levels as last year, the next year will see an injection of about US$135 million worth of bond notes, with the injection being spread over 12 months in line with export receipts.
The question that becomes important then is responding to fears that the US$135 million worth of bond notes will destabilise pricing structures, in particular, the goods market pricing (inflation) and currency prices via the exchange rate route.
For Zimbabwe that has a GDP of US$12 billion and monetary aggregates around US$5 billion, US$135 million injected over a year is surely not an amount that can possibly cause price distortions considering it will incentivise production and replenishing nostro accounts.
Dollarisation has had the negative impact of dis-incentivising exports of manufactured goods for the obvious reason that the incentive to generate foreign currency would be zero, particularly at a time capacity utilisation is so low that all output can be easily absorbed in the domestic market. The incentive should, therefore, be a non-inflationary stimulus package to incentivise exports.
Although it is a good idea to incentive exports across the board, the RBZ may need, in future, to carefully re-categorise exporters and better reward those making extra effort. Mineral exports should not be incentivised at the same rate as manufactured goods because the latter are going an extra mile to export products that may equally be sold in Zimbabwe without all the hassles associated with exports.
On the same note, issues relating to policy equity come to the fore, especially for manufacturers who are in key import substitution sectors. Such manufacturers correctly argue that by substituting imports, they are equally as important as those exporting and should, therefore, get rebates to remain competitive, failure of which their exit from the market can easily be filled by imports, thereby worsening the balance of payment position. Whatever arguments will come up, output incentives are key in a country in need of jobs and growth. The fact that the USD environment brings about economic stability is not debatable, but it is important to equally understand that its ability to deliver jobs and growth at sustainable levels is very limited. Upon dollarisation in 2009, policy fixation was on stabilisation considering the impact of hyperinflation, and that thinking was not wrong.
And indeed for seven years, we have stabilised, but unfortunately that stability has not been able to deliver growth to impact positively on job retention and creation.
Some big companies went bust after dollarisation, while quite a number of those still standing are limping towards their graves. The major challenge of the current deflationary environment relates to real debts that continue rising, trapping corporate balance sheets in corrosive pools of unsustainable debt.
The worst bit is that Zimbabwe is in a deflationary environment yet interest rates have remained very high, especially for borrowers in default who attract penalty rates above 20 percent per annum.
When that is juxtaposed with falling revenues and operating costs that are so stubbornly high, industry is in big trouble.
The carnage that has happened on the Zimbabwe Stock Exchange since dollarisation bears testimony to this.
It is no surprise, therefore, that even the Zimbabwe Revenue Authority is battling to recover tax debt that has ballooned by 31 percent to US$2,5 billion for the first three months of 2016 from the December 2015 levels. Tax revenue dipped 10 percent in the review period.
There is no doubt, therefore, that the economy needs policy interventions to ease the market and not just to incentivise exports. And it’s not only the broad macro-economic indicators that are pointing south.
Household debt as a percentage of disposable income is hovering around 63 percent and it explains why emotions are leading to higher rates of murder, whilst the absence of jobs in the market could be pushing testosterone levels beyond the norm. That probably explains why rape cases have increased over 80 percent since 2010 to 7 752 recorded last year.
Dollarisation has created a very tough environment where generating income for an ordinary person is becoming more difficult by the day, the very reason why policy-makers should focus on creating jobs.
Therefore, the argument for quantitative easing in the economy should never be taken lightly. Zimbabwe, with domestic financing as a percentage of GDP at around 31 percent, is stuck in a quagmire and remains one of the lowest in the world for countries not over-reliant on natural resources.
We need around US$4 billion-US$5 billion of fresh funding to allow the banking sector to allocate credit and push domestic financing as a percentage of our GDP to around desirable levels of 80 percent, which levels will allow the economy to engage in massive infrastructure projects, create jobs and set the foundation for industrialisation. No country has industrialised without a solid infrastructure base, and Zimbabwe has limited ability to cheat this statistic.
It is, therefore, increasingly clear that the economy needs creative but non-inflationary ways to stimulate growth, create jobs and bolster incomes.
And the bond notes – as long as they remain import incentives for now – may provide part of the relief.
Zimbabwe has a good history under its belt of rejecting currencies that are not stable or worthless (mazuda). The rejection of the Zimdollar and the South African rand should be sufficient comfort for the market that indeed use of currency is dictated more by ordinary people than policy-makers. Fortunately, the RBZ seems aware of it; the reason it has gone out in full force to engage and give assurances that bond notes are a genuine export incentive. The central bank knows that excessive printing will make the notes suffer the same fate as that of the rand and Zimdollar.
◆ Brains Muchemwa is an economist.
