Imagining Zim with bond notes

27 Nov, 2016 - 00:11 0 Views
Imagining Zim with bond notes There real fears arbitrage opportunities will re-awaken the parallel market

The Sunday Mail

Persistence Gwanyanya —
NOW that the Reserve Bank of Zimbabwe has officially communicated that bond notes will be rolled out this week, it has become opportune to envision how the future of the markets could pan out.

There is definitely need for frank discussion on what the future might hold. It is important to note that bond notes are not supposed to cure all the economic challenges Zimbabwe’s economy is facing, but largely only to provide a monetary instrument to deal with externalisation and cash shortages.

Policymakers should be mindful of the enormity of the task to rebuild the economy and the need to come up with substantive solutions as opposed to quick fixes and half-measures.

Long-term solutions will undoubtedly be premised on economic rebalancing — increasing production and exports whilst reducing consumption and imports. This is the only way we can sustain a stable liquidity situation.

Policies to attract both domestic and foreign capital will be key to kick-starting economic recovery. Also, the envisaged bond note economy does not have space for corruption: it must end!

Economists often say expectations are self-fulfilling prophecies. It is unquestionable that there is a constituency that is betting on arbitrage opportunities that might arise from the changed monetary system.

And foreign currency shortages will make it difficult to keep the parallel market for currencies in check. However, it will be important to minimise its influence.

The market has been debating bond notes for the past six months, with the concomitant effect of creating an environment of uncertainty, speculation and arbitrage.

There are already some unscrupulous retailers who are charging higher prices on electronic payments compared to cash payments. Others are even selling cash at a price as high as 10 percent.

This cannot be allowed to continue. It is hoped that there will not be any further delays to the roll-out of bond notes as this will cause more harm than good.

Further, some sections of the market believe that bond notes, although anchored by the Afreximbank facility, will be discounted against the US dollar since use is confined to the local market.

The mounting foreign payment backlog, which highlights the mismatch between demand and supply of the green back, could promote arbitrage.
Banks have payment backlogs that date as far back as three months.

However, efforts by the RBZ to negotiate a US$150 million nostro stabilisation facility have to be commended. The amount is roughly the same size as the amount held by commercial banks in their nostro accounts at US$157 million.

This, coupled with the reduced need for cash imports necessitated by usage of bond notes, will improve banks nostro positions and, thus, their ability to fund necessary imports.

The RBZ imports an average of US$10 million in cash weekly on top of what banks are bringing in to meet their requirements. Rebalancing the economy is the only long-term solution.

But for the economy to be rebalanced, there is need to resolve challenges associated with deep-seated structural challenges, infrastructure deficit and policy inadequacies.

For the RBZ not to squander the goodwill it has, it has to stick to its promises. The cumulative facility of US$250 million for bond notes and coins will reduce the total exposure to bond tender to US$19,23 per person, and given the total population of 13,5million people, this is not high enough to disturb market dynamics.

Being a reputable institution, there is no doubt that Afreximbank will endeavour to protect its reputation by ensuring that Zimbabwe keeps its side of the bargain.

Protecting the value of bond notes has to be a collective effort, especially against the excesses that naturally arise wherever shortages manifest. The fact that bond notes are an alternative to transacting does not mean plastic money transactions have to be shelved.

The uptake of plastic money has been encouraging and it will complement bond notes. This makes infrastructure sharing imperative and the RBZ should continue to drive this initiative.

Infrastructure sharing on equipment that supports electronic payments will make transactions more efficient and cheaper. Monetary authorities also have to be on the lookout for counterfeit notes, especially in an environment where technological innovations increase risks.

However, the fact that the bond notes will be in small denominations equivalent to US$2 and US$5 helps. A notable intervention to rebalance the economy is Statutory Instrument 64 of 2016, which restricts importation of products that Zimbabwe has capacity to produce.

But this, too, might not provide a long-term solution. A look at the developments in the cooking oil sub-sector is revealing. Some shops are now demanding cash for cooking oil purchases. One hopes that Command Agriculture will be a success.

Government’s efforts to set the economy on a sustainable economic growth path should be married to a new re-industrialisation effort. Re-industrialising Zimbabwe will largely depend on policies to attract foreign and domestic capital for retooling and technology upgrading.

Economic rebuilding efforts will be supported by investment in infrastructure. It is estimated that Zimbabwe has an infrastructure deficit of between US$14 billion and US$20 billion, which essentially is a gap that FDI inflows can cover.

But there is no capital that flows where policies are bad. Nor can that environment retain capital. There is need for vigorous economic and structural reforms in Zimbabwe and improvement of the ease of doing business.

So, the journey is still long and hard.

Persistence Gwanyanya is an economist, banker and a member of the Zimbabwe Economics Society who writes in his personal capacity. Feedback: [email protected] and WhatsApp +263773030691

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