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No healthy bond with notes

a WEAK currency is the sign of a weak economy, and a weak economy leads to a weak nation, American business magnate Ross Perot once said.

a WEAK currency is the sign of a weak economy, and a weak economy leads to a weak nation, American business magnate Ross Perot once said.


Zimbabwean depositors have watched helplessly as their deposits lose value following the cash crisis which failed to subside following the introduction of bond notes last year.

The bond notes were introduced as an export incentive facility to cushion exporters ravaged by the use of a strong currency, dollar, in the multi-currency basket.

The $200 million facility is guaranteed by the African Export Import Bank with monetary authorities saying a new $300 million facility will be introduced.

The note was introduced at par with the dollar despite criticism from analysts who equate the surrogate currency to a ploy by government to reintroduce the banished Zimbabwean dollar that was demonetised in 2015.

Experts say the bond note has followed Gresham’s law, driving away good money (dollar) from the formal market. This has seen the dollar attracting a premium of 30 and 50% for bond notes and real time gross settlement (RTGS) respectively on the thriving parallel market. This has seen prices rising as companies pass on the cost of procuring the dollar to customers.

Economist Moses Chundu said bond notes were smuggled into the economy as the real reason for their introduction was never acknowledged, but veiled behind the need to incentivise exporters.

He said what should have been incentives to exporters and remitters of cash was eroded by the resultant parallel market rates that meant the 1:1 rate created arbitrage opportunities which rational economic agents capitalised on.

“Going forward the current administration will have to introspect and make tough but informed decisions on the subject in order to restore credibility and confidence in the financial sector,” Chundu said.

He said citizens paid the price in the form of sharp price increases in response to parallel market developments at a time when incomes have not changed.

“Thus given average price increases of 50%, it means people’s buying power has been halved which is not good for both producers and consumers.”

Buy Zimbabwe chief economist Kipson Gundani said the administration of the incentive through bond notes caused people to hold real currencies triggering inefficient circulation of money and scarcity of dollars.

He said the export incentive has to be administered through a real currency to deal with distortions in the market.

“This has created a perpetual loss of value on bank balances. It was the Sarajevo that sparked the distortions,” Gundani said.

The murder of Archduke Franz Ferdinand, heir to the Austrian throne, in Sarajevo on June 28, 1914 was the spark to World War I.

Gundani said the focus should be on addressing production issues through the creation of an enabling environment that brings confidence by reversing “all that was done wrongly like the indigenisation law and national budget”.

In responses to NewsDay, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya said the export incentive scheme has and continues to serve its intended purpose of promoting and securing exports as is evidenced by a 40% increase in the country’s exports during the 10 months of the year compared to the same period last year.

He said the export incentive scheme was inculcating an “export culture in the economy, an export drive that was lost when the country dollarised”.

“The export incentive scheme is the one that is making it possible for the country to earn more foreign exchange that is required to import essential products such as fuel, electricity and cooking oil,” Mangudya said, adding that foreign exchange does not “come cheap, especially in the world competitive environment”.

“Incentives are required to promote exports, production and productivity. As the funding mechanism for the export incentive scheme, bond notes are an integral part of the export success story of the Zimbabwean economy over the past year now.” The introduction of the bond notes has seen the emergency of a multi-tier pricing regime of dollar, bond note, RTGS and swipe.

Mangudya said the multi-tier pricing system was a symptom of the scarcity of foreign exchange in the country as the economy imports more than it exports.

“This mismatch causes premiums on foreign exchange on the parallel market. Premiums or different costs on foreign exchange manifest themselves through the multi-tier pricing system. The sustainable way to tame the multi-tier pricing system is to increase the inflow of foreign exchange in the economy,” he said warning the situation would have been worse had it not been for the export incentive scheme.

The major cause of foreign exchange shortage within the economy, Mangudya said, emanated from the spill-over effects of the fiscal deficit which is substantially financed from domestic sources.

“The domestic financing of the fiscal deficit increases domestic money supply (increase in RTGS balances) which is not backed by a commensurate increase in foreign exchange. It is this increase in money supply which is not matched by foreign exchange receipts that increases the demand for foreign exchange. The export incentive scheme is therefore a strategy to enhance forex receipts to ameliorate this mismatch and not to exacerbate the mismatch,” he said.

Mangudya said parallel markets for foreign exchange the world over existed due to shortages of foreign exchange and not caused by medium of exchange like wire transfers, mobile money or bond notes.

“To suggest or to think that a medium of exchange like bond notes cause a parallel market for foreign exchange is quite unfortunate and oblivious of the fact that premiums on RTGS transfers are much higher than on bond notes or mobile payments,” he said.

Zimbabwe, Mangudya said, needed to open up the economy in order to increase the flow of foreign exchange and put in place friendly investor policies, the game changers for the economy and the bedrock for currency stability.