RECENT revelations by the Reserve Bank of Zimbabwe (RBZ) that bond notes will be launched in the next three months have been met with mixed...
RECENT revelations by the Reserve Bank of Zimbabwe (RBZ) that bond notes will be launched in the next three months have been met with mixed feelings by the market.
Those who are cautiously optimistic about the delay argue that it is necessary for the central bank to consult with the general public and reflect on the merits and demerits of the policy measure.
Pessimists, however, argue that this is likely to worsen the country’s liquidity situation ahead of the launch of the bond notes. Then there is also a third group that is made up of radicals who are against the introduction of the bond notes altogether.
They believe that bond notes are unlikely to incentivise exporters or even liquefy the local economy.
It is the last school of thought that I find more interesting, not because it is the most accurate, but because it questions the key fundamentals on which the bond note concept is based whilst also questioning whether it is the best policy given the current circumstances.
Despite the varying views about the bond note concept, different groups of people share common aspirations about the future of the local economy.
We all hope for a better economy, which can deliver us from the current economic malaise.
As such, the views of every Zimbabwean on the issue of bond notes, whether he is an economist, a doctor, a vendor or even a rank marshal, are equally important and need to be listened to with the same ear.
This is because policies operate through people and their success depends on how the people perceive and receive them.
Suffice to mention that an analysis of these different schools of thought is important in shaping our understanding of the bond note concept and thus projecting how well the concept will be received by the market.
The first school of thought is predicated on the need to educate the general public on the intention of bond notes and the merits of this policy measure.
Contrary to the view that bond notes are intended to replace the multiple currency system, they are in fact meant to act as an export incentive scheme, which involves providing a bonus of 5 percent bonus on exports in form of bond notes, which are backed by a facility of $200 million from the Afreximbank.
According to the RBZ Governor, Dr John Mangudya, had it not been for the export incentive scheme, bond notes would not have been introduced.
Given the precarious state of Zimbabwe’s trade balance, one would easily buy into RBZ’s view of the bond note concept at face value.
However, a close look at this concept may reveal that it is inadequate to meaningfully influence the country’s exports.
To fully draw on the US$200 million facility that is backing the bond notes, the country needs to export goods and services worth $4 billion.
If we assume that the average annual exports of $3,6 billion achieved between 2010 and 2015 are maintained into the future, the country needs slightly more than a year to exhaust this facility in export incentives and bonuses.
This means that the export incentive scheme will also have a life of slightly more than one year, unless an additional facility is established to support the scheme.
In this connection, I see the export incentive scheme as a way of injecting bond notes into the economy, ostensibly to support local liquidity as bond notes cannot be externalised.
Thus, to suggest that the bond note facility is only an export incentive scheme is logically inconclusive.
In actual fact, Zimbabwe needs exports to support liquidity more than any other country in the world because, being a dollarised economy, it cannot print money.
Exports are therefore a means to an end and not an end in themselves.
There is nothing wrong in telling the country that bond notes are intended to liquefy the economy on a more sustainable basis in view of rampant externalisation of the much needed US dollar.
We all know the importance of the US dollar and how crucial it is to preserve it.
No matter how the export incentive scheme concept is packaged, we know that the reason behind it — the need to provide a more sustainable way to preserve local liquidity by minimising capital flight — is noble.
This is why the second school of thought views the delayed introduction of bond notes as further worsening the country’s liquidity situation.
If Government is dead set on the new initiative, it has to be done without delay. This will minimise speculation and the self-fulfilling prophecies, which would subject the bond note to attack and therefore possible rejection.
Currencies by their nature are more susceptible to speculation.
The Asian financial crises of between 1996 and 1997, which saw Asian currencies succumbing to speculative attacks, bears testimony to this fact.
Given the low confidence levels and memories of the 2008 financial sector debacle, the bond note issue is unlikely to be well received no matter how good the concept is packaged.
The contract of trust between monetary authorities and the general public was broken. The bank run that has recently hit the financial service sector, leading to some banks reducing their cash withdrawal limit to as low as $50, is telling.
Anxieties are encouraging speculative behaviour in the market.
In essence, the third school of thought is in sync with the second one, which predicts that bond notes are a precursor to a crisis in the finance sector.
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| Reflections on delayed bond note launch |
It also believes that the export incentive scheme will not boost the country’s exports as expected.
The performance of the export sector is largely weighed down by deep-seated structural problems in the economy typified by the dilapidated infrastructure, inefficient utilities, obsolete equipment and outdated technology.
The performance of the export sector is largely weighed down by deep-seated structural problems in the economy typified by the dilapidated infrastructure, inefficient utilities, obsolete equipment and outdated technology.
Needless to reiterate that appropriate policies should be put in place to attract FDI so as to invest in the said enablers to competitiveness and to transform our public institutions into more efficient and effective service providers.
There are unexploited, seemingly ignored but ostensibly effective ways to remedy the country’s liquidity challenges. It’s also the contention of the radicals that the promotion of plastic money would a better and more sustainable solution to the country’s liquidity challenges, while it sorts out the structural challenges.
The world over demand for physical cash is sustained through the use of plastic money. In the US, for example, out of the US$15 trillion bank deposits, only US$1,5 trillion is supported by physical cash.
This is the same scenario across a number of developed and developing nations.
Surprisingly, while reiterating the thrust towards plastic money, little precious action is being done by RBZ to promote the use of plastic money. The same applies with banks, retailers and wholesalers.
By now we would expect all service stations to be adequately equipped with Point Of Sale equipment.
The same is expected for municipalities, toll gates, schools, churches and Government departments. However, it seems as if its business as usual.
There seems to be more noise on bond notes that anything else yet the introduction of bond notes depends more on confidence levels than the use of plastic money.
Just as driving a cashless society is important, there is need to plug the holes of illicit financial flows. It is estimated that in 2015, the country lost US$1,8billion in illicit financial flows and an estimated US$15 billion was swindled from Chiadzwa diamonds.
Government should set example by dealing decisively with these issues.
Persistence Gwanyanya is an economist and banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer. For feedback you can email percygwa@gmail.com or WhatsApp +263 773 030 691.
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