Debating the bond notes exchange rate peg

Persistence Gwanyanya
AS the black market for currencies persists, some market watchers are increasingly calling for the abandonment of the bond note exchange rate peg as a deliberate measure to minimise the growth of parallel market activities.

Among these voices is respected economic consultant, Professor Ashok Chakravarti, who is also a strong protagonist for the use of the rand as a reference currency, and Professor Steve Hanke, an economic expert who believes that the currency peg will be unsustainable in the absence of access to US dollar capital markets.

These free market proponents opine that the currency peg has created arbitrage opportunities due to different exchange rates for the bond notes in the formal and informal market.

They also linked the extension of the parallel market for currencies to endeavours by enterprising citizens to capture a wider market for currencies.

However, the Reserve Bank of Zimbabwe (RBZ) remains unmoved, arguing that bond notes are indeed a surrogate currency backed by a similar US dollar facility from Afreximbank, and should trade at par with the US dollar.

Instead, the apex bank contends that the country should foster production and exports as a measure to sustain this currency peg.

Interestingly, while these authorities agree on the necessity of foreign currency reserves to sustain a currency peg, they differ in the approach to achieving the desired exchange rate for bond notes.

RBZ seems to believe that a peg-and-follow approach is the best at the moment since the cash challenges in Zimbabwe are beyond monetary policy.

Pegging the bond note exchange rate at par to the US dollar would effectively compel policy makers to boost exports through supply side interventions.

Otherwise shortages of foreign currency would result in discounts for bond notes on the parallel market, which is currently the case.

On the other hand, the free market protagonists argue that the bond note exchange rate should be floated, which would result in their depreciation, a situation necessary to signal the need to boost exports, without necessarily fuelling a black market for currencies through arbitrage opportunities created by the currency peg.

But the RBZ maintains that floating bond notes is not a desirable option as it would lead to an early de-dollarisation. The bond notes currently make up about a fifth of the total cash in circulation, including nostro balances.

The surrogate currency is expected to increase its dominance to about half of the cash in circulation when the additional export incentive facility of US$300 million is drawn down.

According to the central bank, Zimbabwe is not yet ready to de-dollarise as economic fundamentals do not support this economic imperative.

It maintains that the following should be achieved before the country de-dollarises: sustainable foreign exchange reserves equivalent to one-year import cover; sustainable Government budget; demonstrable consumer and business confidence; health of the job market; and average industrial capacity utilisation of above 75 percent.

Additionally, the current currency regime is considered to be important in fostering the fiscal discipline needed for economic rebalancing, which is the answer to Zimbabwe’s economic challenges.

Some economic experts, however, feel that pegging the exchange rate would not stop a forced de-dollarisation given the dominance of the informal sector in Zimbabwe.

It is important to note that it is difficult to control public sector growth as long as the country has capacity to issue Treasury Bills.

The increased recourse to monetisation of fiscal deficits has resulted in bloated domestic debt amounting to US$4 billion.

In 2016 alone, Government issued TBs worth US$2,1 billion to support mainly legacy obligations which include expunging RBZ legacy debt and taking over bad loans under the Zimbabwe Asset Management Company (Zamco).

By issuing these TBs, Government created money, which was not supported by physical cash balances and thus exacerbated the parallel market for currencies.

As such, there is no guarantee that Government will observe fiscal discipline as long as they have the option to issue TBs to monetise its fiscal deficit.

So, the argument that dollarisation is a tool to instil fiscal discipline does not hold water.

It is also argued that the abandonment of the currency peg would not stop the parallel market for currencies. Electronic money will continue to depreciate as long as exports remain subdued.

Currently RTGS balances are trading at discount of above 30 percent and this currency option continues to depreciate.

The above arguments confirm that the low production and underperforming exports are the major drivers of the cash crunch.

There is need for supply side interventions to boost these economic imperatives.

There seems to be consensus that capital is a binding constraint to boosting production. This underscores the need to implement policies to improve the business and investment environment to attract and retain both domestic and foreign capital.

Needless to mention that, if left unchecked, corruption will weigh down all efforts to rebuild.

 

Persistence Gwanyanya is the founder of Percycon Advisory Services. For feedback WhatsApp +263 77 3 030 691 or email on [email protected]

 

1,472 total views, no views today