Liquidity crunch: Bond notes, sceptical market

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Reserve Bank of Zimbabwe (RBZ) governor John Mangudya announced this week a raft of measures aimed at easing the liquidity crisis currently gripping the country. The measures include a limit on withdrawals, conversion of 40% of export proceeds to South African rands (which has now been abandoned) and the introduction of bond notes, has caused much anxiety and panic in the market. Long queues have formed outside banking halls as people rush to withdraw what little funds they have in their bank accounts. This has led to widespread panic as rumours of the return of the Zimbabwe dollar resurface. Are we going back to the dark days of 2008? Will the introduction of bond notes ease the liquidity crisis facing Zimbabwe or make it worse? Is there an alternative?

The Ritesh Anand Column

This is against the background of a significant economic slowdown over the last two years as political and policy uncertainty increased. Both companies and individuals appear to have lost confidence in the system and it seems that “externalisation” of funds has also increased. The introduction of bond notes, along with other measures announced by the RBZ governor, only help to address the symptoms of the problem rather than the problem itself.

People only externalise funds if and when they lose confidence in a system.

Post-dollarisation in 2009, many Zimbabweans brought in funds from abroad in order to recapitalise their businesses. Hyperinflation had decimated the balance sheets of most companies in the previous years forcing corporates to inject fresh capital into their businesses.

Dollarisation brought with it stability and growth and people felt confident to recapitalise their businesses. How else could bank deposits grow from US$300 million in 2009 to over US$5,2 billion today? Between 2009 and 2012, Zimbabwe’s economy grew by over 7% annually. Since 2013, growth has slowed significantly following the slump in commodity prices, weakening global growth, a strong US dollar and increasing political and policy uncertainty in Zimbabwe — all these factors have led to a dip in economic activity in the country.

Since 2013, the stock market has declined by over 50% reflecting the loss of investor confidence. This is the root cause of the problem. We need to restore investor confidence and create a favourable investment climate. Tinkering with monetary policy without dealing with fiscal and policy inconsistencies will not solve the problem. In fact, it may even make things worse.

The introduction of bond notes may ease the liquidity crisis, if and only if, people have confidence in the system. Unfortunately, many Zimbabweans have lost confidence which makes it extremely challenging for government to get people to accept the new notes.

Nonetheless, provided the bond notes are backed by hard currency such as the US dollar, through a facility with Afrexim Bank, there is no issue. The bond notes will trade at parity with the US dollar and help eliminate externalisation of funds. The temptation to print bond notes not supported by hard currency is what people fear and as we head towards elections in 2018, it’s not unimaginable that the printing press will be put to work again.

Like Zimbabwe, Argentina adopted a multicurrency regime alongside the peso following the Tequila crisis in 1995.

While this initially provided stability, it was restrictive. In the case of Argentina, replacing the peso issued by the central bank with dollar-denominated notes issued by commercial banks helped eliminate the perceived risk of the devaluation of the peso, increased the supply of bank reserves, reduced banks’ demand for reserves and promoted a return of deposits into the banking system. The result was much lower interest rates and a boost to Argentina’s lagging economy.

There is nothing novel about such a system. It is technically feasible and can begin to operate provided people have confidence in the issuing authority. I’m not sure if people still have confidence in the RBZ, especially so soon after the 2008 crisis?

While Mangudya has done a wonderful job of stabilising and strengthening the financial system in recent years, however, these measures seem ill-advised. The long queues outside banking halls reflect neither. Furthermore, these measures need to be supported by radical fiscal and policy reforms. Greater political stability and will be required to restore confidence in Zimbabwe. Without this the situation is likely to get worse and neither bond notes nor restrictive measures will get Zimbabwe back on an upward trend.

Of grave concern was the conversion of 40% of export proceeds to rands. Over the last three years, the rand has depreciated by more than 50% and most analysts expect it to decline further given the country’s bleak economic outlook. Why would exporters accept a weaker currency especially if they need to pay for imports in US dollars?

Mangudya did a good job to quickly withdraw this measure.

It’s time we got serious about policy reforms. Monetary policy alone will make little or no difference. Zimbabwe needs to implement a comprehensive economic turnaround plan with the support of the International Monetary Fund and World Bank. I have always said that the government’s economic policy document, ZimAsset, is a wish-list rather than economic plan. Zimbabwe needs to implement radical fiscal and legal reforms that increase the level of transparency and reduce corruption.

In addition, the economy remains too inflexible and desperately needs a supply-side overhaul. Government desperately needs to win back the hearts and minds of its people. It won’t take much to transform this resilient economy. The question is: does government have the political will and ability to do it?

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