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Dr Mangudya

Dr Gift Mugano

The Central Bank Chief Dr John Mangudya last week issued a statement to the effect that Zimbabwe will be introducing bond notes in a couple of weeks.Chief among the reasons for the introduction of a $200 million bond notes backed by the $200 million facility are easing liquidity, reducing externalisation of foreign exchange and provision of export incentives.This is a very important matter for many stakeholders in and outside Zimbabwe. As such, it will be important that we debate it so that we come to a common understanding on the implications of this move and come to some common ground as we work together to make our country great.

The big question this discussion today want to unpack is whether the bond notes can make significant impact on improving liquidity, addressing externalisation of the foreign exchange or provide incentives on exporters or rather it will bring more costs than harm.

In order to address this question this article will unpack the real root causes of liquidity problems, externalisation of foreign exchange and reasons for subdued exports and then possible implications of the bond notes.

The root causes of the liquidity crunch can be traced from the sources of money under dollarised environment. There are four key sources of money under the multiple currency regimes which are exports, foreign direct investment (FDI), remittances and aid.

With respect to exports, Zimbabwe’s exports have been performing dismally due to a number of factors.

These include inter alia subdued commodity prices in the global market mainly as a result of new economic model adopted by China, high cost drivers, low capacity utilisation, general lack of capacity to export in some sector due to structural rigidities in agricultural sector, strengthening of the United States dollar which has seen the South African rand depreciating by more than 100 percent since September 23, 2011.

This situation has seen our exports getting more expensive while imports became cheaper. We have become an attractive market for the region and beyond — we have become a dumping ground.

As a result, our trade deficit has ballooned over the years to about $3 billion per year. This $3 billion is clearly a hole in our economy which has caused serious liquidity crunch and we must deal with it head on!

With respect to FDIs, Zimbabwe is getting on average 10 percent of what regional countries like Mozambique, South Africa, Nigeria and Angola are getting mainly due to country perception and issues around policy consistency and policy clarity among other issues. This situation is obviously not helping much in addressing liquidity challenges.

On remittance, over the years, Zimbabweans from the diaspora made significant contribution to this country’s foreign exchange requirements. Just last year, we received close to $1 billion from our brothers and sisters abroad.

This was received through the official channels like Mukuru, Western Union and Money Gram excluding the monies which came through the buses and envelopes. Here we are doing well.

With regards to aid, our hands are tight here because of the debt overhang. We are receiving limited funding from bilateral and some like-minded multilateral financial institutions. We could have leveraged more on bilateral aid especially from China but alas most of the monies has stayed in China and we got the materials donated to us.

To make matters worse, we are actually expected to pay off our arrears in line with proposals we made in Lima. What this means is that this “cylinder” is not firing.

The question as to what is causing externalisation of monies is very broad. Externalisation itself is broad as it can be looked from various angles like transfer pricing, under declaring exports, imports, capital flight and smuggling of cash across the borders, etc.

Addressing this cancer, externalisation, requires concerned efforts around strengthening institutional capacities of regulators like Zimbabwe Revenue Authority, Reserve Bank of Zimbabwe (RBZ), economic ministries and law enforcement agents. In addition, dealing with particular causes like imports requires us as a nation to invest in raising national productivity and even putting measures which discourage imports like local content requirements.

Finally, the issues around national competitiveness of exports requires broad measures aimed at raising national productivity. We must always keep it in mind that productivity is identical to competitiveness.

We need to have a paradigm shifts in our mind sets to have a new philosophical approach that we can do it and actually do it! This requires concerted efforts in attracting FDIs for retooling by everybody, proper prioritisation of limited resources for productive sectors not imports. This must start with the Ministry of Agriculture and then everybody!

Having unpacked the causes of liquidity, externalisation of foreign currency and reasons for low exports, we can now review the possible implication of the bond notes on the same.

The question is can the bond notes address the three objectives stated above. The answer is obviously NO!

As a matter of fact, the bond notes has brought anxiety, as expected. If anything, it will worsen liquidity crisis as people are making panic withdrawals. There is also possibility of capital flight. Obviously, economic agents will not see their money safe in Zimbabwe banks.

Let us not forget that under very normal circumstances, where uncertainty about currency issues were minimal, people didn’t want to keep their monies in banks because of lack of confidence in the banking system. In this instance what guarantee is there that there will be assurance that normalcy will prevail?

As a matter of fact, our monthly trade deficits are above $200 million if we take into account the annual 3 billion total deficit. Against this background, one would like to know why we bother ourselves with a $200 million facility which in this case is a drop in the ocean.

There are also possibilities that potential investors will go into a wait and see attitude thereby withholding the monies which should improve liquidity. This also applies to monies which come through foreign banks. I am sure we all agree that when we go to the automated teller machines (ATMs) we always see brand new notes. The foreign banks are playing the role of the lender of last resort!

Although we don’t want to be ignorant of the fact that the Governor of RBZ over stressed the fact that the bond notes will not exceed $200 million, the reality on the ground is that economic agents will not believe that and as we know an economy moves in a self-fulfilling prophecy their action will always give us unintended results of such policy.

Can the bond notes address externalisation of monies? The answer is NO! In as much as this is a cancer in our economy, we are merely dealing with a symptom here. The fundamental causes of externalisation are rooted in transfer pricing and under declaring of exports, even smuggling and imports.

The Governor in his statement with The Sunday Mail underscored that he feared that if he inject the $200 million the Government got from the Afreximbank it will go into thin air. Mr Governor, we actually risk having the majority our individual accounts which are holding billions of dollars going into thin air because of the reasons I explained above.

There is even more risk that the bond notes may be rejected, can depreciate as people, particularly in the parallel market may choose to exchange the bond notes at a lower rate than stipulated by the RBZ.

Why may it be rejected? The public has not been given thorough explanation on its uses. For example, in instances where say one individual has a mortgage with a bank like FBC, is that person rightfully allowed to pay the instalments in bond notes as opposed to the US dollar as enshrined in the agreement with the bank?

If FBC took the bond notes on the basis that the bond notes are at par with the US dollar as advised by the RBZ, is it guaranteed that FBC will be able to access its money from the $200 million facility which is backing the bond notes? Mathematically, the answer is yes but my question is looking at the practicality of this matter.

I am an economist, these are issues I am grappling with. I am sure the generality of the citizenry basing on the information in the public domain are having the same questions.

In every normal circumstance we must always strive to allay all fears which the public have of a particular policy. As committed Zimbabweans we must always dialogue with open mind so that if need be we dump the policy.

I am of the view that the bond notes bring harm than gains. As I have indicated on the areas it is trying to address it falls within the scope of addressing symptoms not root causes and above all it can come with more challenges.

Going forward, it is important that the Central Bank should always consultant stakeholders on issues of such magnitude before making bold statements of intent. These consultations must be genuine and be backed up by evidence — concerned stakeholders should present position papers and a way forward should be agreed.

A policy measure or position must never be donated to the people for inclusive growth.

However, we still have the opportunity to dialogue. Hence, let us debate!

Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: +263 772 541 209 or [email protected]