The Sunday Mail
Persistence Gwanyanya —
Inasmuch as some are against bond notes, their introduction is imminent. Now that people have sufficiently discussed why it should not be done, there is need to discuss and focus on how it should be done. Government has advised that the law supporting the “surrogate currency” is currently being crafted.
Reserve Bank of Zimbabwe statistics also indicate that exporters have begun accruing export incentive bonuses. By December 31, 2016, this facility is forecast to have grown to US$75 million. This simply means that US$75 million in bond notes will be injected into the economy as an export incentive bonus scheme by the end of this year.
It thus becomes imperative to debate the roadmap so as to minimise the risk of policy failure. I believe that basing the export incentive scheme on outright exports might not be enough to sufficiently boost export performance. It is, however, good insofar as it ensures that the issuance of bond notes is tied to exports, which minimises the chances of inflation.
But what is vitality important is to ensure that bond notes continue to trade at a rate of 1:1 with the United States dollar. However, the fact that exporters will be entitled to the incentive – irrespective of whether their exports are growing or declining – is not good enough to spur exporters to produce more and better quality products.
An analysis of the US$200 million Afreximbank Counter Cyclical Facility, which will support bond note issuance, reveals that it’s most likely going to be exhausted when exports reach US$6 billion, which is probably by end of 2017 basing on average annual exports of US$3,6 billion. Thus, in its current form, the bonus scheme is insufficient to sustainably boost exports.
I think an Incremental Export Incentive Scheme (IEIS) would have been the best to boost productivity and exports. The efficacy of this approach was proven in countries like China, Malaysia and India that adopted the export-driven growth model. But it should be realised that besides incentivising exporters, the export-incentive scheme is a mechanism through which bond notes will be injected in the economy.
Currently exports are less responsive to any policy stimulus due to deep-seated structural challenges. This means that by adopting the IEIS approach, injecting the US$200 million bond notes into the economy would take time as it requires exports to increase by US$6 billion. This is ostensibly the reason why RBZ opted for the current approach.
It is, therefore, imperative to complement bond notes by other measures that sustainably boost productivity and exports. Policies to attract and retain FDI, together with measures to boost competitiveness, should be seriously considered. Bond notes will be injected into different banks in respect of the export proceeds they handle. Banks that handle more exports will have more bond notes in their coffers than those that handle less.
There are fears that such banks might ultimately be prejudiced if bond notes are not sufficiently embraced by the market. But the notion by the central bank that no one will be forced to accept bond notes is questionable given the cash challenges in Zimbabwe. Desperation for cash would mean the transacting public would have to accept bond notes.
The suggestion by the RBZ that it will provide forex in exchange for bond notes to those unprepared to accept them only makes sense if the intention is to redistribute the bond notes among banks. However, there should be a proper redistribution methodology that doesn’t disadvantage banks. A methodology that prescribes the minimum amount of bond notes that a bank can hold basing on an acceptable measure such as the amount of cash held by that financial institution would be appropriate.
Additional operational modalities required in the event of minimal acceptance of bond notes call for concerted marketing efforts to encourage acceptance. This also makes the need to promote other measures to ease cash shortages imperative to minimise the impact of any bond note failure.
It becomes clear that the introduction of bond notes has to be supported by measures that support a robust electronic money ecosystem so as to offer the transacting public a viable alternative for transacting, which also minimises the cash challenges. It seems Zimbabweans are warming up to the use of plastic money, with about 80 percent of retail transactions now electronic. Banks should invest in robust infrastructure that supports faster, cheaper and efficient electronic transactions, thus making infrastructure sharing more urgent.
Banks should invest in shared point of sale systems and other equipment that supports electronic money. In such a structure, this will inevitably mean bond notes will only cater for change and small cash holdings, thus effectively minimising the demand for physical cash balances.
The quantum and small denominations of bond notes means that they will be inadequate to address the country’s cash challenges, especially given the fact that the country is currently importing an average of US$15 million cash per week. Electronic money has to fill this gap.
Like any other facility that affects citizens, bond notes have to be anchored by a relevant legislation. Currently, there is no provision to issue bond notes in the Banking Act. Because the Reserve Bank Act is subject to Section 68 of the Constitution, a law to support issuance of bond notes is a precondition.
The term sheet or facility letter from Afreximbank, which spells out the terms and conditions of the facility, is necessary to instil confidence in the transacting public that Government will not print more than the facility provides for. This is probably the reason why the RBZ has not yet gone into overdrive in marketing bond notes.
There is need to expedite these processes especially considering that gazetting laws takes time. Overall, the bond note concept should be viewed as transitional measure and not a permanent solution to the country’s cash challenges. The concept makes economic sense because it is supposed to deal with cash shortages by improving exports and addressing capital flight challenges.
Exports are an important source of liquidity and growth in a dollarised economy. Exports contribute more than 60 percent of Zimbabwe’s liquidity, hence the need for measures that sustainably improve this economic variable. The world over, the US dollar is targeted for externalisation simply because apart from being a store of value, it is also considered a reserve currency. In Zimbabwe, the US dollar is estimated to be overvalued by more than 25 percent.
Bond notes will be able to plug leakages as they will only be accepted as a unit of exchange within Zimbabwe. It should, however, be appreciated that it’s not ordinary citizens who are responsible for externalising most US dollar, but rather influential and well-connected people. Government should have the resolve to deal with such people.
The permanent solution lies in economic rebalancing which involves increasing both production and exports. This should be complemented by reducing consumption and imports. Rebalancing requires indomitable will power to implement policies without half-measures.
Persistence Gwanyanya, an economist and banker, is a member of the Zimbabwe Economics Society. He writes in his personal capacity. Feedback: [email protected] and WhatsApp +263773030691.
