…Market jittery over bond notes
PRESIDENT Robert Mugabe’s government is struggling with a chronic headache of how to deal with the deteriorating liquidity crunch and cash crisis, while facing a dilemma over which currency Zimbabwe should use on a sustainable basis, it has emerged.
Fast running out of options to stem the growing cash crisis, government moved to propose introduction of bond notes to ease the liquidity situation amid concerns the new measures could result in damaging unintended consequences.
The market was jittery yesterday as fears of the return of the demonitised local currency, run on banks, arbitrage and explosion of black market due to excessive exchange controls, renewed instability in the banking system, and currency inconvertibility mounted.
Senior Ministry of Finance officials told the Zimbabwe Independent yesterday that Reserve Bank of Zimbabwe (RBZ) governor John Mangudya announced plans to introduce US$200 million bond notes backed by an African Export-Import Bank (Afreximbank) facility due to fears that if he directly poured the money into the dysfunctional market it would soon vanish as has been the case since the multi-currency system was introduced in 2009.
“Government is at crossroads over the currency issue. There are many reasons why the bond notes are to be soon introduced. One is to curb the worsening cash crisis. The other is to avoid the leakage of the US$200 million from Afreximbank. The country has become a major source of the (United States) dollar which is the most used currency in international transactions and the world’s primary reserve currency.
“As an anchor currency, most governments hold it in significant quantities as part of their foreign exchange reserves. Being a safe-haven currency, Zimbabwe has become a source market of it for all sorts of traders, brokers and dealers, hence illicit financial flows. Last year banks imported over US$600 million at a premium, which is why the US dollar is overvalued locally and the country is uncompetitive, but most of that money was funnelled out through imports and siphoning.”
Mangudya in February announced stringent measures, which included limiting cash withdrawals without one-day prior notice to US$10 000, restrictions on offshore investment, and suspending free funds to tackle illicit money flows and capital flight, after nearly US$2 billion evaporated from the economy through externalisation last year.
In his monetary policy statement, Mangudya said he would implement tight measures to stem illicit financial flows haemorrhaging the economy.
He said out of the US$1,8 billion externalised in 2015, US$1,2 billion was siphoned out by corporates with outward individual transfers accounting for the balance.
“Against this background, Mangudya was afraid the US$200 million will quickly vanish and the cash shortages will get worse. Hence, those bond notes.
“In addition to this, government is seized with the currency issue which is now a cause of grave concern to monetary and fiscal authorities. They considering many options, including introducing the South African rand as the common legal tender, which is why measures were taken to promote wider use of the rand compared to other currencies while limiting the dollar.”
An unsustainable trade or current account deficit, poor balance-of-payment position as well as massive revenue leakages and an uneven distribution of liquidity in the market have worsened the cash shortages.
Apart from announcing the imminent arrival of bond notes in US$2, US$5, US$10 and US$20 denominations, Mangudya came up with a series of other measures to promote the circulation of the rand other currencies.
The other new interventions include daily bank withdrawal limits to US$1000, Euro1000, R20 000; conversion of 40% of all foreign currency receipts from the exports to the rand and 10% to Euro; establishment of an Afreximbank-backed US$200 million export incentive facility and allocation of foreign currency according to priority levels.
The central bank’s measures came at a time when cash shortages are exacerbating against a backdrop of inadequate capital inflows, low commodity prices on the global markets, deflation and all-round economic implosion. Credit risk remains high in the challenging economic environment.
Ministry of Finance officials say Mangudya’s move reflects serious contradictions and problems over currency in government and the need for a decisive action.
“The multi-currency system brought macro-economic stability and exchange rate stabilisation after hyperinflation.
Besides, it sort of brought positive investor sentiment and eliminated speculative attacks on the defunct local currency. This resulted in a more stable capital market, stemmed sudden capital outflows, and made our weak balance-of-payments position less vulnerable to shocks. It also allowed our economy further integration into the global economy,” another official said.
“However, it also brought with it serious fiscal and monetary problems. Firstly, we lost monetary sovereignty; the power of the state to exercise exclusive legal control over its currency. A local currency is a symbol of sovereignty and the use of foreign currency undermines that.
“Secondly, the central bank and the money supply system are now dysfunctional. We can no longer print our own money and this means we can’t directly influence our economy, including the monetary policy and exchange rate regime.
“Thirdly, the Reserve Bank has also lost seigniorage, benefits gained from issuing currency. Its lender-of-last-resort function is now limited. While it can provide short-term relief funds, it won’t be able to provide enough to cover rush withdrawals in the event of a run on deposits.”
Debate on whether to continue the multi-currency regime gained currency after the formation of the inclusive government in 2009, with some hawkish Zanu PF officials pushing for the return of the local unit.
Discussions on whether or not to dollarise, “randify”, maintain the multi-currency regime or restore the redundant local currency are currently intensifying behind the scenes at high levels in government, sources said.
Mangudya has tried to explain the situation to calm down the alarmed markets.
“The shortage of USD cash in the country, as evidenced by queues at some banks and automated teller machines, is attributable to a number of intertwined factors that include: the dysfunctional multi-currency system as a result of the strong USD. In the case of Zimbabwe, the USD has become to be more of a commodity, a safe-haven currency or asset than a medium of exchange,” Mangudya said on Wednesday.
“The strong USD continues to make Zimbabwe to be: high cost producing country; very expensive tourist destination; a fertile ground for capital flight and/or externalisation, and dependent on the USD cash for almost all domestic translations. The USD has replaced all the other currencies in multi-currency basket, namely the rand, euro, the British pound, Chinese yuan, pula, Australian dollar, Indian rupee and Japanese yen.”
Zim currency timeline
- 1980: The first Zimbabwean dollar was introduced and replaced the Rhodesian dollar at par. The Zimbabwean dollar was worth more than the US dollar in the official exchange market, with Z$1 being equal to US$1,47;
- 1997: The Zimbabwe dollar plunges a record 72% on Friday November 14, an episode widely regarded as the precursor of the country’s economic meltdown. The day is known as “Black Friday”. The dollar crashed after President Robert Mugabe, under pressure from war veterans, ordered unbudgeted payouts of Z$50 000 for each war veteran as compensation for the role they played in the liberation struggle;
- 2003: As hyperinflation develops, the Reserve Bank of Zimbabwe (RBZ) issues short-lived emergency travellers cheques, which were then quickly superseded by time-limited Bearer’s Cheques, in denominations ranging from Z$5000 to Z$20 000 in 2003, then up to Z$100 000 by early 2006;
- 2006: The RBZ redenominates the Zimbabwean dollar, devaluing the currency by 60% against the US dollar in the process;
- 2007: The Zimbabwe dollar was devalued again, this time by 92%, to give an official exchange rate of Z$30 000 to US$1, although the black market exchange rate was estimated to be Z$600 000 to US$1;
- 2008: RBZ debases the dollar whereby Z$10 billion would be worth Z$1.
– Later that year RBZ announced that a further 12 zeros would be taken off the currency, with Z$1 trillion being exchanged for Z$1.
– By the end of the year the Zimbabwe dollar had become largely irrelevant. The economy by then had almost completely dollarised;
- 2009: Acting Finance minister Patrick Chinamasa officially announces Zimbabweans would be allowed to conduct business in any currency as a response to the hyperinflation crisis;
- 2014: The RBZ imports bond coins to ease a shortage of change in the economy; and
- 2016: The RBZ announces it plans to introduce bond notes valued at US$200 million, among several other measures designed to contain an acute liquidity crunch and cash crisis.