THE Reserve Bank of Zimbabwe (RBZ) has been forced to implement new monetary policy measures to address the current cash crisis through combination of export incentives and bond notes, but the move has sparked a storm of doubts and protests largely due to lack of confidence in monetary and fiscal authorities, as well as government as a whole.
While RBZ governor John Mangudya’s move is well-intentioned, given the mounting pressure and growing desperation in the economy for a solution to cash shortages that have forced banks to reduce daily cash withdrawal limits to as little as US$200 from US$3 000, his interventions are being undermined by lack of confidence in the idea of a local currency.
Fears that Mangudya could be attempting to reintroduce a local currency through bond notes backed by a US$200 million Afrexim bank nostro-support facility gripped the market despite his repeated clarifications that the defunct Zimbabwean dollar is not coming back anytime soon because the macro-economic fundamentals are still unstable.
On the streets, introduction of the bond notes is synonymous with reintroducing the now defunct Zimbabwe dollar which was recently demonetised by the central bank after being decimated by record levels of hyperinflation.
Mangudya also moved to ease a cash crisis through increased usage of other currencies within the multi-currency basket, the use of electronic money to reduce demand for the United States dollar, capping withdrawal limits at US$1 000 per day, while limiting individual cash exports to US$1 000.
The central bank chief also announced 40% of all new US dollar foreign exchange receipts from export of goods and services, including tobacco and gold sale proceeds, would be converted at an official exchange rate to the rand and 10% to euros to spread the demand for currencies before this was abandoned on Tuesday. He also ordered all retailers and wholesalers to use point of sale machines to limit demand for cash and to display all international exchange rates in all banking halls.
This was over and above his export incentives to encourage more exports to bridge the trade or current account deficit.
In the words of a top local economist close to the central bank, Zimbabwe’s biggest problem with bringing a local currency is that “the nation has painful memories of the hyperinflation nightmare that took to its peak in 2008 resulting in shortages of basic commodities such as food items are still fresh in people’s minds”.
Mangudya convened a press conference to map the central bank’s strategy to lead the country out of the cash crisis where he surprised many by announcing plans to introduce the bond notes.
Analysts say the introduction of bond notes without prior market consultation in itself defeats any attempts to inspire confidence.
“What is needed is trust in the system and right now we don’t have that because we are living too close to our recent history,” one economist said. “If they bring a local currency and we are back to hyperinflation again but hopefully they won’t.”
Former economic planning minister and current MDC-T shadow finance minister Tapiwa Mashakada said government ambushed citizens by introducing bond notes without wide consultations.
“The bond notes have been imposed on the people,” Mashakada said, adding it exacerbates mistrust in the banking system.
“The people have already lost confidence in the banking system, that’s partly why there is no money in the banks to meet depositors demands and these bond notes will not change anything.”
Banks reduced daily withdrawal limits to US$200 from US$3 000 due to cash shortages as hundreds of millions are being externalised.
Cash shortages have worsened after Mangudya announced plans to introduce the bond notes with depositors making a run on their cash.
Economist Vince Musewe said Zimbabwe has no confidence in a local currency and government.
“Absolutely not! The 2008 nightmare is still fresh on the brains of many and nobody trusts this government when it comes to money issues. Confidence is very low as you know,” said Musewe in an interview.
Harare lawyer Tawanda Nyambirai said confidence on the bond notes is under threat due to a number of issues, including the fact that the bond coins of 2014 remain unlawfully in circulation because they are open-ended and have no maturity date.
“The confidence that the investing public will have in the ability of the state to access the Afreximbank facility to redeem the bond notes will determine whether or not the bond notes will be tradable, and at what discount, if any. It will not be lawful to compel the acceptability of the bond notes.”
Oxford Economics owned NKC African Economics said Zimbabwe will continue being hamstrung as long as it does not have a sovereign currency.
“The country’s lack of a sovereign currency hamstrings its monetary policy operations,” said NKC.
“We commented previously that the measures introduced by the central bank in its January monetary policy statement were not enough to improve the liquidity crunch. Low levels of production and the slump in commodity prices as well as the use of a stronger dollar have adversely affected the growth of export earnings, a source of liquidity, in addition to remittances.
“Foreign currency inflows through foreign direct investment have been limited and the country has distressed debt levels, which weigh on its external borrowing capacity. The much-needed foreign currency continues to be drained through unsustainable trade deficits, starving productive sectors of liquidity that have the capacity to increase export earnings.”