Bond notes rule but fears remain

THE overall cash situation in the country had improved in December due to the introduction of the bond notes, whose commencement started off with some controversy.

But long queues have resurfaced at the banks, despite the introduction of higher denominations notes last week.
The Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, in November last year introduced the bond notes, which have been pegged at par against the United States dollar, despite resistance from the public, which feared the new currency would experience a battering, triggering shortages and the emergence of a commodities black market.
But today, the notes have become a dominant feature in local transactions and are being dispensed by banks instead of the greenback.

Although the bond notes were meant to be an incentive to exporters, the currency, said to be backed by an African Import and Export Bank (Afreximbank) facility, has been used in place of US dollars to mitigate a cash crunch that troubled the country for much of last year.

The RBZ has said its ceiling for bond notes in the economy would be US$200 million, in line with the Afreximbank facility.

Analysts told the Financial Gazette’s Companies & Markets (C&M) that the drift into local currency was likely to affect banking sector stability and also ruin the country’s fragile economy if the quantity of the surrogate currency circulating in the market is not managed well.

They warned that the use of bond notes, inevitably, has posed serious challenges, particularly in the financial sector which could fail to service off-shore lines of credit they accessed for on-lending in Zimbabwe.

The situation is also likely to trigger an inflationary crisis due to the fact that the money is not backed by production in the economy.

“It’s a big challenge for local institutions to access (foreign) cash for settling their offshore transactions unless one is on the Reserve Bank of Zimbabwe priority list for foreign currency allocation,” said senior research fellow at the Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU), Cornelius Dube.

“It’s quite a big issue,” Dube noted.

Economist, John Robertson, said: “People are still queuing for bond notes, meaning that bond notes are just out numbering the United States dollars, which are disappearing.

He warned: “Government has to be careful with the quantity because it is the quantity that will determine value. If they (bond notes) become too much, they would lose value.”

There are fears that the cash-strapped government could soon start to print even larger volumes of bond notes to fund a number of its local commitments, and buy foreign currency from the market for its external obligations.

This, it is feared, could result in another hyperinflationary scourge probably of the magnitude witnessed in 2008 that forced the country to abandon its currency.

Many ordinary citizens lost their life savings when the currency lost value.

For ordinary Zimbabweans, memories of the collapse and demise of the Zimbabwean dollar in 2009 and the hyperinflation that caused its destruction are still fresh in their minds.

Government is desperate to raise cash to pay its workers, estimated at over 350 000, but it does not have the financial capacity to do so.

Considering that the country is headed towards elections, the ruling party may be tempted to print significant volumes of bond notes to enable government to pay civil servants.

In response to questions from the Financial Gazette’s Companies & Markets, Bankers Association of Zimbabwe (BAZ) president, Charity Jinya, said although bond notes usage had resulted in an improved cash situation, she hinted that it was not a panacea to cash shortages in the market.

Jinya said: “Bond notes were introduced, largely as an incentive to exporters, in a manner that would not encourage further foreign currency leakages as notes are only useful within the country.”

“As bond notes cannot be externalised and contribute, in a carefully managed way, to the stock of cash in the market, this has resulted in improved availability of cash in the market. Bond notes are, however, not a panacea for cash shortages in the market.”

Mangudya, recently said about US$80 million worth of bond notes had been issued to the market, which BAZ described as a “minor part of the overall money in circulation in the country”.

But this injection was followed by a further release of an undisclosed amount of $5 bond notes.

BAZ insists loan repayments are “part of the priority list for foreign currency allocation” and will therefore not be affected by the introduction of bond notes.

Jinya said: “Banks’ ability to service offshore lines of credit largely depends on the level of exports generated, the level of Diaspora remittances and foreign direct investment into the country.

“It is important for banks to keep track of the foreign loan repayments as they disburse the limited foreign currency in line with the agreed priority list. Loan repayments are part of the priority list for foreign currency allocation.

“We at BAZ continue to encourage the transacting public to make more use of electronic payment channels and use of bond notes for local transactions in order to conserve foreign currency for priority imports and loan repayments.

“Important measures such as the ease of doing business, policy consistency and predictability, are key factors in building market confidence and stability.”

CBZ Holdings chief executive officer, Never Nyemudzo, echoed Jinya’s sentiments.

He said the introduction of bond notes had “a positive impact not only in the banking sector but the national economy as a whole”.

“Bond notes have reduced cash shortages in the economy and have provided liquidity through the five percent export incentive scheme,” said Nyemudzo.

Commenting on the possibility that these could undermine banks’ capacity to repay offshore lines of credit, Nyemudzo said: “Our lines of credit are a mix of import and export finance. They are predominantly export finance availed to exporting companies, thus the repayment thereof is linked to export receipts of the financed entity.”

Zimbabwe officially adopted a basket of foreign currencies which included the South African rand, the Botswana pula, the British pound, the Euro, and the United States dollar in 2009 to end a hyperinflationary crisis that had resulted in widespread commodity shortages and the collapse of all economic activities.

Last year, the country faced severe liquidity problems, with local banks running out of US dollars due to an import-export imbalance.

Imports widened significantly and the outflow of cash from the country increased.

This gradually depleted the stock of money in the economy, and the situation was worsened by the fact that government started borrowing heavily from banks and eventually failed to raise the cash to pay back its debts.
This worsened the cash crisis.

Banks were forced to set withdrawal limits of as little as US$50 a day and hundreds of Zimbabweans had to sleep in bank queues to withdraw their money from banks.

In the run-up to the introduction of bond notes, which were first announced in May last year, opposition parties and civil society groups protested against the new currency, saying it would worsen the country’s economy.

Former vice president, Joice Mujuru, who now leads the Zimbabwe People First and Harare businessman, Fred Mtandah, approached the courts in a bid to stop the RBZ from launching the bond notes, saying the move was unconstitutional and an infringement on fundamental rights.

Mtandah has since lost his High Court case, but that for Mujuru is yet to be determined.

Lawyers have also approached the Constitutional Court challenging the use of Presidential Powers in promulgating the law supporting the introduction of bond notes. – FinGaz

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