It would be funny were it not sad: The absurdity of the notion of using bond notes as an export incentive
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| RBZ Governor, John Mangudya |
In the seven years since the introduction
of the multi-currency system, in spite of there being a basket of several
currencies, the US dollar has remained the predominant currency in use,
fulfilling the major functions of money in an economy i.e. store of value, unit
of account, means for payment. Any deviation from the system that is seen to
have stabilized the financial system was always going to be a hard sell. And
with good reason too. No-one really trusts the mandarins running the economy!
The
$200 mln dollar question
Undoubtedly, the biggest question on
the minds of most Zimbabweans is whether this heralds the reintroduction of the
Zim dollar? The answer to this question is neither here nor there, but most
economic watchers concur that this policy intervention is indeed an indirect
method of introducing the Zim dollar.
Why go through all the trouble of
printing new bond notes to trade at par with the greenback, if all one seeks to
achieve is to provide an incentive to exporters? There are many other methods
the Reserve Bank of Zimbabwe (RBZ) could have employed to this end, without
creating all the confusion and commotion this pronouncement has caused. Never
mind the administrative burden imposed on banks of creating and maintaining
multiple currency accounts for clients, and integrating them on their IT
infrastructure and transaction platforms like Zimswitch. Furthermore, there will likely be additional costs borne
by the customers in the way of service charges and account maintenance fees of
transacting across multiple accounts. All this trouble so that manufacturers
are induced to increase exports?
Is
pegging the bond notes to the US dollar feasible?
The RBZ insists the bond notes will
trade at par to the US dollar, effectively signifying a currency peg of the
bond notes to the dollar. But conventional economic theory tells us that for an
economy such as ours, this is simply not practical. Here is why; a dollar peg
uses a fixed exchange rate and that means the country's central bank
promises to give a fixed amount of its currency in return for a U.S. dollar. To
maintain this peg, a country must have adequate dollars on hand. However, we
know for a fact that Zimbabwe does not have sufficient reserves to maintain
such a currency peg. It would be a fool`s errand to belabor this point as the
facts are apparent for all to see that it is not feasible. How will the RBZ
acquire large amounts of foreign currency reserves to be constantly buying
or selling the bond notes? Effectively, the RBZ has run out of options and
decided to print its own US dollars. Unfortunately, that is not how the world
works.
Demand
vs Supply
These are the fundamental tenets upon
which modern capitalism and economic theory are hinged upon. Given the public`s
general distrust of the central bank, however skillfully the apex bank may try
to disavow allegations that it is slowly re-introducing the Zim dollar, the
general public will just not buy their argument. One can almost see a situation
where traders accept payment for goods and services rendered in the greenback
only, thereby creating distortions in the economy. Once the transacting public refuses to accept
the Bond notes, it would not be hard to fathom a situation where the bond notes
trade at a discount to the US dollar, thereby creating a parallel market for currencies
in the economy. For however long this practice would continue, it would render
the proposed logic behind this policy intervention redundant.
Bank
Runs
Zimbabwe`s banking system though
fairly stable, is fraught with legacy issues stemming from the collapse of
several banking institutions, both post and prior to dollarization. As a
result, confidence in the local banking system has remained muted, and this
latest policy intervention by the central bank will not help matters. Already,
we are witnessing panic withdrawals from banks as customers attempt to hold
onto the US dollar notes. This has exacerbated an already dire situation as the
little liquidity there was in the system is being milked away as people prefer
to hold the greenback as a safe haven, in light of the uncertain times ahead.
Weaker banks that had already been in a precarious liquidity situation are
likely to fold as market liquidity runs dry. This further entrenches an already
existing problem by way of such a catastrophe potentially spilling into other
sectors of the economy. Furthermore, going forward, deposits into the financial
system will be adversely affected on account of higher fees mentioned earlier
as well as diminished confidence in the banking sector.
Turning
into a de facto rand economy
With forty percent of all foreign
exchange receipts being converted into the South African rand, this implies a
gradual shift towards being predominantly a rand economy. It would not make
much sense for businesses to operate on rand denominated revenues, while
incurring dollar denominated expenses. It follows that another couched effect
of the central bank`s policy measures is that the country will be a de facto
rand economy. However, as the economic prospects for South Africa appear dim
for the foreseeable future, the rand will inevitably be highly volatile.
Retailers will likely see this as an opportunity to maximize profits through
quoting higher prices for goods and services in multi-currencies, in an attempt
to provide cover for adverse currency fluctuations. The issue of excessively
high profit margins by retailers will have to be addressed as this new currency
dispensation progresses, as it could very well likely be one of the major
determinants of whether the measures put forward by the RBZ succeed or fail.
Who
controls the printing presses?
The years 2017-2018 are effectively
election years, with political campaigns and electioneering commencing as
political parties push for votes. The question then becomes what is to stop the
government from printing out more bond notes when it is hard pressed for cash
as it has notoriously done in the past? Such is the general level of distrust
with the local authorities that questions such as these crop up every now and
then. Regardless of how noble the central bank`s efforts may be, it cannot run
away from the credibility deficit attached to it by the general public.
At the end of the day, it is a
confidence issue, and Zimbabweans by and large do not have confidence in the
central bank`s proposed bond notes. Fact!
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