Bond note introduction to ease cash shortages
Conrad Mwanawashe Business Reporter
THE planned introduction of bond notes, expected before the end of the year, will improve business transactions and help ease cash shortages Zimbabwe is currently facing, a new survey has shown.
But economists and corporate players were quick to say that the reactions from the market show that the plan could have an opposite effect than the desired plan.
This came out at a policy seminar organised by the Macrofinance and Financial Management Institute of Eastern and Southern Africa to discuss findings of a survey conducted by leading economist and University of Zimbabwe senior lecturer in the Department of Economics Dr Albert Makochekanwa last week.
The survey on reactions and perceptions of economic agents within the first seven days after the announcement of plans to introduce bond notes showed that while negative perception permeated the market, other economic players believe the bond notes could actually have a positive effect.
Presenting the findings of the survey, Dr Makochekanwa said although some respondents were negatively affected by the announcement, some believed the bond notes could be one of the solutions to the current financial challenges including helping to stem externalisation.
“We asked the respondents the possible advantages and disadvantages of introducing the bond notes to economic activities. On the advantages the majority said it will ease cash shortages,” said Dr Makochekanwa.
“Others said bond notes are good because Government can easily print whenever they want while others said it will encourage the use of plastic money and (because they are not fungible outside Zimbabwe) therefore cannot be externalised,” he said.
The introduction of bond notes as an incentive to exporters is one of the measures announced by the Reserve Bank of Zimbabwe to deal with cash shortages while simultaneously stabilising and stimulating the economy. The bond notes are backed by a $200 million Afreximbank facility.
While announcing the measures, the RBZ said that cash shortages were due to, among others, the dysfunctional multi-currency system as a result of using the strong United States dollar and because the USD has become more of a commodity, a safe haven currency or asset than a medium of exchange.
Low levels of use of plastic money and the real time gross settlement (RTGS) platforms making Zimbabwe predominantly a cash economy, low levels of local production to meet consumer demand, leading to higher demand for foreign exchange to import consumer goods, low consumer and business confidence as reflected by high appetite by both consumers and business to keep cash outside the banking system and inefficient distribution and utilisation of scarce foreign exchange resources are some of the reasons the bank said were causing the financial challenges in the country.
The financial squeeze has negatively affected business transactions and led to the setting of maximum withdrawal limits in banks. But the survey showed that the bond notes could improve business transactions.
Dr Makochekanwa said on the negative respondents said because the bond notes are not convertible internationally this may discourage investors.
“Some said bond notes will erode confidence the financial system. They think that since Government can print at will, this will result in a return to hyperinflation and promotion of the black market.
Discussants at the MEFMI policy seminar expressed mixed feelings towards the introduction of the bond notes with some saying the plan led to a slowdown in investor programmes.
The Zimbabwe Investment Authority chairman Nigel Chanakira said the lead time was too long and as a result there was panic in the market. He said it is not prudent to announce a policy way ahead of time of implementation.
More importantly, he said applications for new investments had declined on the comparative period last year.
“I can tell you as chairman of ZIA, we are now down 70 percent of our applications from the previous year.
“Clearly once you send out such signals people sit on the fence, people don’t implement their projects and people believe what the domestic people are saying; you are introducing a currency through the back door. That’s the belief of the people,” said Mr Chanakira.
He said the plan to introduce bond notes had on the other hand led to the growth in the use of plastic money.
“On the ground as well, interesting developments, prior to this development (plan to introduce bond notes) some of my own businesses the composition was 80 percent of transactions on cash and 20 percent on electronic.
“Now we have a total switch, we’ve 20 percent coming through as cash and 80 percent on electronic. So I would say kudos, its working,” said Mr Chanakira.
He said the move would make banks profitable.
“In a functional economy it’s expensive for banks, as a former banker myself, to bring in currency, means you bring in clean notes. You would need to shuffle the clean notes with the dirty ones, export the dirty ones, you need security and money counters; it’s a whole hierarchy that you don’t want to know as a banker. Guess what this move will make banks more profitable as far as I’m concerned in terms of moving to the digital market. So there is the good and the ugly.
“There are some gains that we have had as a result of this. We are going digital than ever if you look at the transactions they are up,” said Mr Chanakira.
“However is it worth the shocks that have been transmitted into the system? I would argue that it is not worth the trouble. We have more fundamental issues to address. It is not prudent to normally announce a policy way ahead of time,” he said.
Techfin Research and former banker Mr Alphious Ncube said the central bank should consider going back to the drawing board on the issue of bond notes. He encouraged the central bank to engage local researchers during the policy development stage.
“I think as the central has a lot of work to do. You may have to go back to the drawing board I think what it has done currently is to destroy the confidence in the market.
“There is no confidence in the local people. You need to bring that confidence back. Please do not shy away from engaging the local researchers and players in the market to contribute to your policies before you announce them,” said Mr Ncube.
MEFMI director – Debt Management Programme Mr Rapheal Otieno questions the wisdom of creating a $200 million liability to “create further liabilities” in the form of export incentives to exporters.
“Should you have used another option that would not have created additional liabilities? Lots of things are there; tax incentives would have been a better route than to use this liability ($200m Afreximbank facility) to create further liabilities,” said Mr Otieno.
RBZ deputy director in charge of exchange control Farai Masendu said since the announcement in May, about $390 million in exports has been recorded translating to about $10,2 million in export incentives through bond notes, if they were to be introduced immediately.