The Sunday Mail
Persistence Gwanyanya
THE panic that has gripped the market following announcement of the Reserve Bank of Zimbabwe’s intention to introduce bond notes points to the need for monetary authorities to build confidence among the transacting public ahead of the introduction of these notes.
The RBZ should fully appreciate that policies work through people and their success largely depends on how people react to them.
Given the low confidence levels that currently characterise Zimbabwe’s financial service system, there is need for serious awareness campaigns, coupled with a lot of ground work, to promote the acceptance of the bond notes.
It is also important for the central bank to anticipate the likely challenges of bond notes and take proactive measures to mitigate the same.
Because a currency is needed to grease the wheels of commerce, its acceptance is of paramount importance for the smooth operation of an economy.
Money and banking are fiduciary concepts, which thrive on the confidence levels of the banking and transacting public.
In this regard, there is need for the RBZ to clear the negative perception that might have been formed around bond notes.
My take is that the idea makes sound economic sense on paper.
Bond notes are in essence a local currency that is supposed to liquefy the local economy on a more sustainable basis.
The fact that Zimbabwe uses foreign currency for both local and foreign payments has created a disproportionate demand for this scarce commodity, making the country more susceptible to liquidity challenges.
This is exacerbated by the unbalanced state of the economy, typified by high levels of imports against low exports.
Zimbabwe is going to print US$200 million worth of bond notes supported by Afreximbank facility for the same amount.
Thus, bond notes are not fictitious money as touted by some market watchers.
Bond notes usage will be confined to the local economy with the concomitant effect of preserving local liquidity.
The biggest fear among lay people is that the RBZ may print more bond notes than the facility level supporting them, which could fuel inflation.
There are some who question the rational of printing bond coins instead of outright importation of the $200 million cash to liquefy the economy.
My understanding is that the bond notes will be printed outside the country and as the provider of the facility, Afreximbank, will have monitoring mechanisms to ensure that RBZ does not print more than US$200 million bond notes.
The preference of bond notes comes against the background of the high incidence of externalisation of money out of the local economy.
Because bond coins are fungible and convertible to the US dollar at 1:1 and to the other multiple currencies in use at the ruling exchange rate, there is fear that these notes may drive away the good money in the country.
In the earlier days of its introduction, we are likely to see consumers and businesses alike holding back the greenback and preferring to use bond notes in local transactions.
The greenback will be preserved for imports and as a store of value.
The impact of this is to increase the supply of bond notes whilst also increasing the demand for the alternative currencies, mainly the US dollar.
This will lead to internal devaluation of the bond notes, which may see them traded in the informal market at a discount.
The total supply of money may decrease instead of increasing, leading to tighter liquidity conditions.
However, given that the amount of bond notes is only four percent of the total bank deposits of around US$5 billion, the impact on of bond coins on the black market may not be that extensive as some pundits suggest.
On a positive note, the possibility of bond note devaluation will create a strong case for the use of plastic money.
The preference for plastic money will be spurred by the fact that bond notes are fungible and convertible.
Once deposited in the bank account, they are reflected as US dollar balances.
Increased preference for plastic money is a positive development in that it will rebalance the economy towards low demand for physical cash.
The good thing is that the introduction of bond notes will be accompanied with the thrust towards increased use of plastic money.
As such, all wholesalers, businesses, local authorities, utilities, schools, universities, colleges, service stations, Government departments, parastatals and the informal sector are now required to install and make use of the requisite point of sale machines.
This directive is long overdue, and whilst reiterating the need to create a revolution of use of plastic money in Zimbabwe, I think the RBZ is still not doing enough to promote a cashless society in Zimbabwe.
Plastic money will increase the level of money in circulation as it stabilises demand for physical cash and thus increase the banks’ ability to create more credit.
This means the US$200 facility million will be able to support far much more economic transactions.
An ideal economy will always have more bank deposits than the physical money in circulation.
In America, for example, the total amount of cash in circulation is only a tenth of the total bank deposits of US$15 trillion and about 80 percent of consumption in the US is done through the use of plastic money.
Imagine what efficient and reliable POS facilities at all fuel stations, tollgates, hospitals, schools and Zimra outlets among other huge movers of cash would do to the demand for physical cash in Zimbabwe.
However, we need to appreciate that the bond note concept will only ease local liquidity, with limited impact on foreign payments.
Money for foreign payments need to be earned through exports, Diaspora remittances and foreign capital flows such as FDI.
Due to the unbalanced state of our economy, these sources of liquidity have been under-performing.
On the other hand, the country is faced with increasing dependence on imports. Rebalancing the economy towards more production and exports will be the most sustainable way to solve not only the liquidity challenges, but fundamental macro-economic variables such as economic growth, unemployment and deflation.
This is ostensibly the rational for the introduction of the 5 percent export incentive scheme.
However, to tout this incentive scheme as the sole reason of the introduction of bond notes is overly simplistic and underplays its power to liquefy the local economy on a more sustainable basis.
Whilst the idea of export incentive scheme is plausible, the facility is inadequate to solve the country’s production and export challenges.
Zimbabwe has gone through serious deindustrialisation. It is estimated that the country has an infrastructure deficit of between US$15 billion and US$20 billion. A number of companies are using antiquated equipment and outdated technology.
This has impacted negatively on competitiveness.
The amount of money required to reindustrialise Zimbabwe is huge and local capital is inadequate to meet demand.
As such, there is need for increased flow of external capital, mainly FDI. However, FDI flows where conditions of doing business is sound.
Government should take a bold stand to address issues that weigh down on attracting foreign capital.
The journey towards a more rebalanced economy, characterised by high production and export levels continue to be weighed down by other economic adversaries including corruption, corporate governance deficiencies and misappropriation of funds among other economic vices that have become rampant in the business world.
Whilst it may be difficult to quantify the monetary effects of these economic vices, they have remained a significant contributor to the cost of doing business in Zimbabwe and hence the country’s competitiveness.
Unfortunately, little precious action is being taken by the country to address these nefarious activities.
In most cases, there is a tendency by responsible authorities to trim, to take half measures and avoid bold action where needed.
Persistence Gwanyanya is an economist, banker, and member of the Zimbabwe Economics Society. He writes in his personal capacity. Feedback: [email protected] and WhatsApp +263773030691
