The Sunday Mail
Darlington Musarurwa Business Editor
THE market has begun to take speculative positions ahead of the introduction of bond notes, with the US$100-dollar bill the main casualty as some withhold it as a store of value. Some retailers who used to issue varying amounts to consumers through the cash-back facility — an arrangement where shoppers can be afforded cash payments at supermarket tills after buying groceries — are no longer doing so
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As demand for cash soars, banks have resorted to further slashing withdrawal limits. Some banks had capped withdrawals to US$50 by last week. Unsurprisingly, the volume of transactions has moved to plastic and electronic platforms. The Reserve Bank of Zimbabwe says point-of-sale (POS) transactions and plastic money now account for 80 percent of daily retail shop sales.
Much of the anxieties in the market stem from low understanding of the RBZ’s motive for introducing bond notes, especially within the context of several “surrogate currencies” issued by the same institution in the past. There are fears that bond notes could be a reincarnation of several monetary instruments that, although having transactional value, failed to be an efficient store of value between 2003 and 2008.
Faced with cash shortages then, the central bank responded by issuing travellers cheques, which were difficult to transact in because of the strict conditions attached to their disbursement and use. Then on September 15, 2003, special bearer cheques were introduced.
Though their validity was initially for a six-month period, new batches continued to be issued to the market. Special agro cheques were added to the mix on May 5, 2008, specifically to lessen the burden of cash shortages on farmers. The result was informal dollarisation as surrogate currencies were converted into hard currencies, especially the United States dollar, on the black market. It became a convenient method for individuals and companies to preserve asset values, which, ironically, fed into the inflation spiral.
Dollarisation was formalised on January 29, 2009 by then Acting Finance Minister Patrick Chinamasa. While this helped stabilise the market, experts felt there were insufficient structural and legal frameworks to make the system efficient. It was argued that financial reforms attendant to liberasation usually led to increased borrowing by local firms, especially those in sectors whose output cannot be traded internationally (non-tradable sectors).
A paper titled “Financial liberalisation and crisis: Experience and Lessons for Zimbabwe” — jointly authored by senior lecturer in the Department of Economics at University of Zimbabwe Dr Albert Makochekanwa and Dr Gibson Chigumira, executive director of the Zimbabwe Economic Policy Analysis and Research Unit, a local think-tank, in 2014 — indicates that swift action is needed in dealing with the symptoms of financial crisis.
“Financial reforms have achieved better results where they were accompanied by regulatory reforms and the implementation of appropriate prudential regulation . . .Experiences from other countries have shown that a cautious and gradual approach had better outcomes than the rushed or ‘big bang’ approach. Gradual implementation will allow the country to take corrective measures wherever the need arises . . .
“In particular swift action is required when dealing with symptoms of financial crisis before the crisis becomes full blown in order to maintain stability and confidence in the banking system. “Inability to react quickly on the part on the part of the authorities may result in bank runs, whose long run impact on the negative perception of the public on the banking sector may be difficult to reverse,” read part of the paper.
Market watchers say because of the rate at which imports were growing relative to exports, the odds were always stacked against the local economy. Although revenue collections have increased annually since 2010, the continued net outflows through imports continued to worry policy makers. A year after dollarisation, the Zimbabwe Revenue Authority collected more than US$988 million, which rose to US$2,2 billion in 2010. By 2015, Zimra was getting more than US$3,8 billion in gross collections.
However, the budget deficit continued to grow in that period. It widened from -0,5 percent of national output, or GDP, to -2,4 percent in 2014. This year, the Finance Ministry forecasts the trade deficit to rise to US$1 billion by December 31. The depreciation of the South African rand against the US dollar also led to increased imports, which in turn drove demand for the greenback.
Enter bond notes
In an environment where the private sector is getting insufficient lines of credit from international financiers, the private sector has had to scramble for finance with Government on the local market. Naturally, most of the cash has been mopped up in this way, especially through Treasury Bills. It is estimated that Government has issued more than US$1,2 billion in TBs between 2012 and 2016.
Though this strained the market, it is believed that apart from normal outflows through external payments, some US dollars are being smuggled out of the country. To plug the gap, the RBZ in May this year introduced an export-incentive scheme that will be paid in the form of bond notes for exporters. It is envisaged that this intervention will stimulate production, especially for exporters in the mining and agricultural sectors, which have emerged as the country’s major sources of US dollars. It will also mean that the “surrogate currency” will not be smuggled out as it will only have value in Zimbabwe.
Experts say the new unit of exchange, which will circulate together with a basket of other currencies, will essentially have the same attributes as the US dollar since it is indexed to it. Where the agro and bearer cheques issued by the RBZ before 2009 did not have any demonstrable underlying value, bond notes will be supported by a US$200 million facility from the Egypt-based Africa Export and Import Bank.
Market watchers say it makes the bond notes redeemable as US dollars particularly in cases where they are used for exports. This, they say, will ultimately preserve their value. It is also being given the benefit of doubt because its production will be sufficiently regulated by the issuer.
Munich-based private company Giesecke & Devrient, which has been printing money since 1854, will print the bond notes. It previously stopped printing money for Zimbabwe in July 2008. While the RBZ continues to import between US$10 million and US$15 million to “liquefy” the market, it says this is not an efficient way of using foreign currency.
“The Reserve Bank is continuously importing cash to liquefy the economy. Whilst this is not a very efficient way of utilising foreign exchange, it is necessary that the bank continues to do so to keep the economy liquid. Reduction in banks’ specific withdrawal limits is a prudent management tool by banks to meet demand. People who are withdrawing cash did not necessarily deposit hard cash in banks but yet they need to withdraw physical cash from banks.
“This mismatch causes queues at banks. Demand for cash will go down the more the consumers resort to use plastic money,” said RBZ Governor Dr John Mangudya last week. There is concern, however, that there will be discomfort in converting bond notes to other currencies, especially the US dollar and the South African rand, for small-scale exporters and travellers.
This is feeding into fears that black market currency traders will devalue bond notes, thereby weakening the appeal of the new currency. Money transfer agencies that have emerged in place of bureax de changes, have largely remained bit-part players. The RBZ has, however, given assurances that individuals will be able to convert the bond notes to US dollars in banks.
Not peculiar
Using a combination of local and foreign currencies is not peculiar to Zimbabwe. Latin American country Ecuador suffered from the adverse effects of the 1998 El Nino and dropping oil prices before introducing the US dollar on September 9, 2000. This had been preceded by a seeming economic collapse where the local currency – the sucre – was devalued and bank deposits were frozen. The country also defaulted on external debt payments.
To this day the sucre circulates alongside the US dollar. Notably, Ecuador faced the same external shocks as those plaguing the local market but it has been able to find relief from external lines of credit and the IMF. These avenues have been closed to Zimbabwe since 2000.
The International Finance Corporation, unit of the World Bank, used to give credit to the private sector but is no longer doing so, while the IMF will only consider loaning Government when Harare settles its arrears, estimated to be more than US$2 billion. Other countries where the US dollar also circulates with local currencies include the British Virgin Island, Panama, Vietnam, Nicaragua and Belize.
