The Sunday Mail
Persistence Gwanyanya —
ALL too often, policy makers breathe a sigh of relief after accomplishing a major assignment. They feel they deserve a rest to replenish their energy levels and revitalise themselves.
The journey towards the implementation of bond notes was long and painful. The traumatic experiences with the Zimbabwe dollar make it understandable why the Reserve Bank of Zimbabwe (RBZ) seemed overly cautious about the surrogate currency.
Now the fact that no major challenges were experienced upon introduction of bond notes could create a sense of hope.
But the country’s problems do not end with just the introduction of a surrogate currency. Just as economists say, a solution to one crisis breeds the seeds for another; new challenges are likely to emerge in the new currency regime.
Sadly, policy makers usually leave it too late to review the impact of their policies, and thus, miss the opportunity detect potential challenges at an early stage.
Solutions are usually more effective when implemented in the early stages of a problem.
Teething problems
It is in the nature of life that anything new is usually met with mixed feelings. The introduction of bond notes was marked by some confusion as a number retailers didn’t warm up to the surrogate currency before acquainting themselves with the security features.
In line with their strategy to reveal the security features of the new currency, simultaneously with its introduction, the RBZ did not provide the specimens for the new currency to retailers ahead of its introduction.
Specimens were only availed through banks resulting in the confusion, which is not good in light of the confidence crisis in the market. It seems the RBZ achieved a fair distribution of the bond notes despite different earnings of the export incentives at different banks.
The distribution methodology used ensured that even banks which did not earn the export incentives received some bond notes. Imagine what could have happened to banks like Agribank and ZB Bank, who have a small export base as they were only removed from sanctions recently.
The quality of bond notes
The quality of bond notes can be judged against the six desirable characteristics of money namely; acceptability, durability, portability, uniformity, divisibility and limited in supply.
The bond notes possess a number of these characteristics except to do with quality. It is disturbing to note that the $2 notes dye out quickly and are not identical. Whilst currencies are never identical, clear differences are a major cause for concern.
There is definitely need for improvement in the next batch of the $2 notes given that only $10 million has been injected into the economy so far. There may also be need to ensure that the $5 notes still to be issued are uniform. This is always important to minimise the occurrence of counterfeits.
Risk of counterfeit
The advancement in technological innovation increases the risk of counterfeits. The impact of bond notes would be more extensive in Zimbabwe as foreign currency is readily available in the economy, being the transacting currencies.
There is high risk that the counterfeits could replace a significant amount of foreign currency, especially the attractive US dollars, thereby worsening the country’s cash challenges.
Claims that some unscrupulous elements tried to counterfeit the bond notes before their introduction are worrying. The poor quality of bond notes issued so far makes them more susceptible to be counterfeited by enterprising citizens.
Impact on parallel market activities
High expectations were that the introduction of bond notes would spur the limping parallel transactions in currencies. However, this has largely been foiled by the limited supply of bond notes, coupled with their availability in small denominations.
Despite some social media frizzy about the inferiority of the surrogate currency to the US dollar, the bond notes are largely trading at par with the US dollar.
In most cases they have augmented the US dollar to purchase other currencies on the black market. However, where this is happening it is on a small scale.
The major parallel market activity is in respect of electronic and hard cash. The US dollar cash is being sold for electronic money at a price of as high as 15 percent.
The high dependence on imports makes it very difficult to curtail this nefarious activity. This highlights the fact that it is difficult to regulate the currency market without the preparedness to accept its judgement.
Potency of bond notes on externalisation
Given the current state of affairs, bond notes would be less potent to remedy externalisation of cash. Bond notes are a small amount relative to the total amount of money circulating in both the formal and informal economy.
Figures of between US$2,7billion and US$6 billion have been suggested in respect of money circulating in the informal sector. The initial amount of bond notes, at US$10 million, is less than 0,4 percent of the estimated amount.
Even the combined total of bond notes and coins’ facilities of US$250 million are a small fraction of the total amount of money in the informal sector at between 4,17 percent and 9,26 percent.
As long as the bond notes continue to circulate alongside the multiple currencies, they will have minimum impact on externalisation. It is difficult to imagine what would discourage the perpetrators of externalisation to continue with their activity as long as foreign currencies remain readily available in the economy.
There are serious dealers in the informal sector who move millions of dollars every day and this constituency is likely to continue with its illicit dealings the new monetary regime.
Since corruption is not in the RBZ’s purview and institutions charged with the responsibility of controlling it seem to be ineffective, bond notes would have been little and no impact on minimising externalisation.
Possibility of export incentive abuse
There is high possibility of abuse of the export incentive scheme especially the Diaspora remittances. Those who externalised money from the economy would benefit from the export incentive of up to 5 percent by just sending back the proceeds of externalisation.
This was going to be welcome if there were strong measures to minimise externalisation as the same beneficiaries would continue to externalise and repatriate the proceeds from this activity, thus earning money in the process.
The tendency of abusing the system is always high in times of a crisis. Again, this demonstrates the urgency for the country to summon a new spirit to fight corruption.
Let the real economy step up to the plate
Bond notes are only a transitional measure to deal with cash shortages. The permanent solution to cash challenges lies in economic rebalancing; increasing production and exports whilst reducing consumption and imports.
However, little precious action is happening to revamp the real economy. The anticipated National Budget Statement will give us an indication of the preparedness of fiscal authorities to deal with real economic challenges.
SI64 of 2016 could have reached its sale by date and may not continue to deliver results as long as productive sectors remain depressed. The country remains unreceptive to capital; both domestic and foreign. In fact, we are experiencing capital fight due to discouraging policies.
General assessment of bond notes
Whilst the bond notes concept could a noble idea, its success to improve the country’s cash shortages depends on a number of external factors. The new monetary instrument should be supported by efforts to rebuild the real economy.
All efforts to rebuild the economy would be weighed down by the corruption cancer which continues to fester around the country. The initial injection of bond notes did very little to improve the country’s cash situation. Queues for cash have remained as externalisation continues unchecked due to corruption.
The road ahead is tough and the country must summon a new spirit to rebuild the economy.
Persistence Gwanyanya is an economist and banker. He is also a member of the Zimbabwe Economics Society who writes in his personal capacity. Feedback: [email protected] and WhatsApp +263 773 030 691.
