It would be funny were it not sad: The absurdity of the notion of using bond notes as an export incentive

 

RBZ Governor, John Mangudya

 That the generality of Zimbabweans are associating the impending bond notes with the ill-fated Zim dollar is a pretty foregone conclusion. The memory of the ghosts of 2007-08 hyperinflation era still lingers fresh in the minds of people. Evidence of this comes in the form of panicked cash withdrawals from the country`s banking system, as the public attempts to hold onto as much of the greenback as they possibly can, in the face of a pointedly uncertain economic future for the country.

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!