The Sunday Mail
THE beginning of winter usually heralds innovation and reincarnation, and, worse for trees, they shed leaves to adapt to harsh conditions.
This winter the ongoing cash crunch, which has been fermenting for some time, emerged much stronger, eliciting responses from the monetary policy authorities.
The crunch has been rebutted with the additional liquidity injection in the form of bond notes, in effect the visible and clearest indication of an increase in the local currency in circulation.
To date, the visible local currency has largely been the bond coins.
Yes, It’s Currency!
As expected, there is ongoing debate on whether the bond notes constitute full-scale issuance of local currency.
It however requires little elaboration that whenever a medium of exchange is issued by a monetary authority, more so with the same authority having the ability to benefit from seignorage revenue, that constitutes currency.
It therefore explains, without doubt, that the bond notes, irrespective of the name given to them, are a legal tender issued legitimately by monetary authorities and as such are a legitimate local currency. The expectation by the same issuing authority that the bond notes will be accepted and shall be used in the market as legal tender, unit of account and store of value rebuts any thinking to the contrary.
It remains true however that the bond notes, for their name, are not Zimbabwe dollars, as the latter carries unpleasant memories that can easily traumatise the markets and destroy confidence that has been built over the years by the adoption of the multiple currency system.
Therefore no one should fault the policy makers for purposefully avoiding using the term “Zim-dollar”, for its memories alone are strong enough to traumatise an otherwise healthy someone and get them admitted in hospital.
Exactly seven years after the introduction of the multiple currency environment, the introduction of the bond notes has reincarnated fierce debate on whether the timing is right.
Not so long ago, thus on 22 December 2015, the monetary authorities, for the umpteenth time, distanced themselves from the reintroduction of local currency.
The rational has always been clear, and so appropriately valid.
By confirming the possibility of reintroduction of the local currency, the authorities have been wary not to bring back the dark memories, knock confidence out of the market, instigate bank runs and in no time, create serious liquidity gridlocks and reverse the gains made over the years.
Yes, it was within their right minds to rebut any such unwarranted speculation, especially after an expensive and unnecessary exercise to demonetise the Zimbabwe dollar had been conducted between June 15 and September 30, 2015.
That process legally extinguished the Zimbabwe dollar out of existence.
On the same thinking, the Minister of Finance, Honourable Chinamasa had issued a statement in July 2014 in full support of the multiple currency regime after rumors of reintroduction of local currency surfaced.
Unfortunately, and very much so, he strongly rebutted the possibility of reintroducing local currency and spelt some pre-conditions that would need to be met before considering the same.
He cited restoration of industry competitiveness, sustainable current account position, sustainable economic growth and restoration of confidence in the banking system, among others.
Two years down the line after his statement, nothing has improved on these parameters.
In fact, all of them have become worse and yet, in the face of such, the wisdom to reintroduce local currency in the name of bond notes has prevailed.
Economic growth prospects have worsened since 2014, from 3,8 percent then to current forecasts of negative 1,2 percent in 2016.
The current account position is no better, whilst the banking sector, much stronger in 2014, has now been buffeted by winds of cash challenges last seen during the dark ages of hyperinflation.
What it is that could have changed between then and now to convince the same authorities to think otherwise remains a mystery, save to say that this has been surely a very difficult decision for the same policy makers who had stood firm in their beliefs.
Why cash crunch now after seven years?
The question that begs the answer and continues to, in some extent, remain unanswered relates to how and why the cash crunch has surfaced now, seven years after dollarisation.
Why did it not start in the formative days when money was literally scarce?
A few rational explanations provide some, but of course not all, of the reasons. Monetary aggregates have ballooned over years, from as little as $475 million in total banking deposits during dollarisation seven years ago, to around $5,6 billion in December 2015.
This monetary expansion, itself a sign of increasing confidence and growing economic activities compared to the preceding hyperinflation era, ballooned much faster on account of break-neck lending that saw loan-to-deposit ratios skyrocketing and peaking at 85 percent in December 2011.
Considering the absence of the reserve ratio in the market and the cocaine-like induced high rates of interest that have long obtained in the market since 2009, there is little reason to doubt that the excessive monetary expansion, for a country without formal arrangement on dollarisation with the US Fed, would one way or the other, run into some challenges regarding funding cash imports.
In simple terms, money has, since 2009 to date, been manufactured quite fast at the signing of loan agreements in the domestic banking sector.
Considering the persistent yawning deficits on the current account, it subsequently became difficult to replenish the nostros at fast enough rates in order to meet the resultant growing demand for cash imports especially after the banks’ retention levels were whittled down.
On the other hand, the bilateral lines of credit, although a much-desired source of financing big projects in the absence of better alternatives, have equally exerted pressure on liquidity outflows.
The bilateral ‘buyers credit’ lines of credit from China and India, among others, have a significant short-to-medium term negative impact on liquidity.
For example, accessing a $200 million bilateral line of credit under an engineering and procurement contract would see equipment and services worth $200 million being shipped to Zimbabwe.
However even well before the project is complete, which projects take years in many such cases, the country would already be paying both interest and principal towards servicing the facility to the overseas originator of the facility.
And that is serious liquidity going out of the country that would need strong compensation from exports on the current account, without which the country experiences serous nostro funding challenges.
Unfortunately our current account has been in tatters since time immemorial and running around $3 billion deficit a year since 2011, its financing has largely been from debt creating inflows from the capital account that unfortunately doesn’t assist in liquidity management in the long run.
The central government, on the other hand, which that has been finding it very difficult to institute expenditure-related reforms to enable it to live within its means in the face of declining fiscal revenue, has equally exerted funding pressure in the market.
These factors, among many others, have exerted significant pressure on the ability of the banking system to fund cash requirements.
Lessons from the past
The lessons from the bond coins should be the learning yardsticks for policy makers. At their introduction in December 2014, there was a lot of skepticism and resistance that saw a significant quarter of society rejecting and deriding them.
Eventually they became acceptable and today they are preferred ahead of the South African rand.
What lessons can be drawn from this? The most important aspect is that the bond coins were not being forced on anyone, neither were there outright threats against anyone rejecting them. The acceptability came out of confidence in that indeed the policy makers had genuine concern to resolve the issue of change that was affecting pricing of good and services.
And more importantly, the stock of bond coins remained more or less static and considering the exorbitant costs of printing coins, new supply was put in check and that stabilised the perceived exchange rate and to this day, bond coins are still acceptable at par to the US dollar.
Gaining market confidence is very important and monetary policy history in this country has clear tombstones depicting how excessive control measures never worked and got buried with time. The foreign exchange controls, the cash withdrawal limits, import restrictions and a plethora of other control measures instituted during the 2000-2008 era never worked and eventually led to the abandonment of the Zimbabwe dollar in 2009.
The tombstones are clear and indeed the cremation of the Zimbabwe dollar during demonisation on September 30 2015 bears testimony to this.
Confidence is earned
Inasmuch as there may be challenges in the current environment, the policy makers need to exercise restraint in the issuance of the new notes to allow the currency to find traction in a market that is full of negativity.
Equally important is for the policy makers to avoid exhibiting panic by coming up with a plethora of controls, restrictions and prescriptions especially at a time they are attempting to gain market confidence.
Confidence is like a currency. It is earned and requires prudence and hard work to earn it; more so, in a market as ours where previously the now defunct Zimbabwe dollar destroyed every known measure of confidence.
Prescribing the type and form of currency that people should hold and use in a multiple-currency environment may defeat the whole flexibility that is assumed to come with multiple currency regime.
The bond notes, if issued with prudence and restraint, should be allowed to compete for space and relevance like any other form of currency currently in use and that way they gain credibility and open acceptance.
As long as its issuance is going to be well managed, it will eventually find traction and widespread preference against some of the other currencies in the basket.
The same goes for the South African rand.
The rand has been depreciating over the last year on account of domestic challenges in South Africa relating to its poor management of domestic finances and global commodity slumps.
And indeed everyone has been alive to the drama surrounding the hasty hiring and firing of finance ministers by President Zuma.
Therefore, efforts to prescribe Zimbabweans to hold the rand against their wishes may be inappropriate and the policy makers should strongly consider the negative consequences and just abandon it.
Yes, South Africa is our biggest trading partner and using the rand may help in resolving the cash crisis but surely attempting to impose the use of the rand in the market may not work.
It is an experiment not worth taking.
South Africans, more than Zimbabweans, should work hard so that their currency can be acceptable beyond their borders.
The policy makers need a serious rethink on this and any other such prescriptions and controls being proposed that end up creating more problems than we intend to solve especially at a time we are introducing our own bond notes.
Controls are a road so familiar to us.
We have walked down this road quite often and it takes us to the same destination and it is high time we introspect and consider more market-friendly options.
The reintroduction of local currency was never going to be easy in this generation, and the policy makers are very alive to it.
Equally, the continued use of the US dollar was never going to deliver prosperity, but just stability.
And that is fact.
Now that our currency is here, the policy makers, more than the market, should strive to employ all known tactics to build confidence around the new notes and prove that indeed this current generation has capacity to learn from its mistakes and correct them.
With odds at 5000-1, Leicester City won the English Premier League.
Brains Muchemwa is an Economist
