The ManicaPost
Kudzanai Gerede Business Correspondent
With over 100 days since the successful introduction of the bond notes into the local market as a surrogate currency to sustain the multi-currency system heavily anchored on the depleting United States dollar (USD) notes, the country’s long-term monetary prospects have once again taken centre stage amid the bond notes devaluation on the parallel market.
Following acute cash shortages that hit the country last year, the Central Bank (RBZ) Governor Dr John Mangudya released bond notes courtesy of the US$200 million Africa import-export bank facility to be traded at par with the USD locally.
Bond notes have helped boost liquidity and instil business stimulus in the economy while they have also given the Central bank some form of monetary control on the financial market but this has come with its own challenges.
The pegging of the bond notes at par with a strong currency like the USD has rendered other currencies in the multi-currency basket such as the Rand, Pula and Rupee dysfunctional and as such it has literally crippled the multi-currency system.
Moreover analysts say this has led to the disappearance of the USD as a stock of value leaving the bond notes dominant on the market in an economy which thrives on massive importation of various goods paid for in foreign currency.
This has given rise to selling of cash at a premium and a three tier pricing system emerging.
Such is how grave the predicament pro-bond notes campaigners and RBZ in particular were tasked with at a breakfast meeting at a Harare hotel recently to mark and review the first 100 days since the bond notes hit the market as they sought feasible monetary options going forward.
While bond notes have provided the solution to end externalisation of a locally transacting currency and improving liquidity on the market with about US$100 million still to be drip-fed, the surrogate currency has encountered challenges of its own.
According to Retailers Association president Mr Denford Mutashu the introduction of bond notes have resulted in increases in profits in the retail services sector inspired by improved consumer spending. Plastic money usage is also gaining momentum.
He however, said some unscrupulous retailers were creating a three tier pricing system that has been fuelled by the need to access the scarce USD currency by giving cash discounts whilst setting higher prices for payments in the bond notes and RTGs.
This has seen inflation go into the positive index since 2013 and economist say crippling out of deflation is positive — at least for now.
“We urge Government to improve support to industrialists and farmers in order for the country to get foreign currency to meet foreign payments and end demand for cash at a premium on the parallel market,” said Mutashu.
He also said the multi-tier system was causing serious price distortions.
Several business players who spoke to Manica Post Business said they are now buying cash at between 20 and 25 percent premiums. They said the market is now predominately transacting in bond notes for goods acquired in foreign currency so the parallel market is the only source of foreign currency since banks were giving first preference to importers of items on the priority goods list.
To compound matters, even non-importers especially in the SMEs retail sector say some wholesale outlets are even demanding at least half payment in USDs which is hurting their operations.
There is however, renewed confidence in the bond notes following President Mugabe’s recent signing into law of the RBZ Amendment Act 2017 (No 1 of 2017) that will regularise circulation of bond notes.
This will criminalise devaluation of the bond notes against the USD.
Analysts seem to agree that the bond notes are necessary in the short-term but going forward they are a disservice to the economy as long as they carry the assumed USD value and production levels remain very low to sustain foreign exchange.
In his presentation, senior consultant and member of the Ease of Doing Business Committee in the Office of the President, Professor Ashok Chakravati said bond notes might have fared considerably well in the first 100 days but due to their assumed value at par with the USD, they were bound to create problems for the economy.
He said for bond notes to be sustainable they have to cohabit with adequate supply of the USD in the economy to avoid devaluation and currently the country cannot maintain adequate supply of the USD.
Resultantly, the unfortunate consequences of this are poor competitiveness when it comes to exports, mismatching of its value which has resulted in selling cash at a premium and unmanageable supply side of the USD in times of scarcity.
“The only way a country has stayed afloat for a long time having adopted the USD is when they have a special relationship with the Federal Bank of America which keeps constant supply of USDs such as the case with Panama.
“Aside from that it is practically impossible to keep USD supply for transacting locally. There will always be constant externalisation of the USD from a USD economy living in a non-USD region such as ours,” said Prof Chakravati.
Chakravati’s view can be substantiated by the dwindling volumes of hard cash circulating in the country.
RBZ figures show that in 2009 soon after adopting the multi-currency system Zimbabwe had US$158 million in hard cash circulation within the economy and even rose to over US$200 million around 2012.
Currently the amount of USD circulating in the economy has declined to about US$70 million plus 100 million bond notes meaning about the rest has been externalised.
However, plastic usage has been widely received and RTGS payments are increasing as a result of increased deposits in the banking sector but analysts are worried by the depleting amount of cash at hand.
They say the US$200 million worth of bond notes remain a far cry of the amount required to stabilise liquidity in the economy.
In 2009 deposits were at US$1,6 billion and have increased to current levels of US$6,2 billion thus the current cash to deposit ratio stands at 6,8 per cent. In order to stabilise liquidity in the economy a healthy cash to deposit ratio should be at 15 percent.
As such the total US$200 million bond notes facility and the US$70 million in hard cash circulating in the economy remains far below about US$800 million needed to stabilise liquidity.
“We have a shortage of US$500 to US$600 million in hard cash and we have no option to replenish it currently,” stressed Chakravati.
He however, said while Zimbabwe currently do not have the right conditions to introduce its own currency, adopting a less firmer but stable currency would be the solution, and the Rand is much more favourable in the sense that 60 percent of trade is with South Africa.
Whether monetary authorities will adopt the Rand, continue with the USD system tied to the bond notes or adopt a new local currency, a reflection on the 100 days journeyed so far points to the need for foreign currency augmentation through seriously revamping exports.
