ZIMBABWE’S decision to introduce bond notes poses a new threat to the country’s efforts to attract fresh lines of credit from international financing institutions (IFIs) and foreign capital.
The Reserve Bank of Zimbabwe (RBZ) last month announced plans to introduce US$200 million worth of bond notes, backed by an Afrexim Bank facility to ease an acute shortage of cash.
Zimbabwe’s cash shortages are a result of tight liquidity and externalisation of the US dollar, which forced government to unveil stringent measures such as capping cash withdrawals, restrictions on offshore investment and suspending free funds to tackle illicit money flows. In February 2016 the RBZ reported nearly US$2 billion was removed from the capital-starved economy through externalisation in 2015.
The introduction of bond notes is viewed with scepticism amid growing fears the central bank could be trying to smuggle through the back door the now defunct Zimbabwe dollar into circulation.
As a result, a crisis of confidence gripped depositors and was to manifest in panic withdrawals that triggered a run on banks.
This has resulted in long queues at banks and institutions running out of cash. Most banks, who are still able to give depositors cash, have capped daily withdrawals at US$100.
The International Monetary Fund (IMF) has previously raised a number of concerns during its Staff-Monitored Programme in Zimbabwe, including the country’s debt and arrears, stability of the financial services sector after successive bank closures, policy consistency with focus on implementation and clarity of the Indigenisation Act as well as unsustainable recurrent expenditure given that civil service wages account for more than 80% of expenditure.
The IMF last week expressed concern over Zimbabwe’s decision to introduce bond notes, saying it will engage government over the issue and other measures aimed at stimulating exports.
The likely impact of government’s recent decision to increase its food imports and mitigate the impact of crop failures on local people will also be considered, IMF deputy spokesperson for the communications department William Murray said.
“We are currently assessing the implications of the measures on the economy, including the more recently announced issuance of bond notes; and we’ll engage in further discussions with the authorities with regard to their strategies,” reads part of the transcript of Murray’s press conference in Washington.
“So, we’re going to have more discussions with the Zimbabweans on this strategy.”
The IMF’s concern over the bond notes, given their bearing on the stability of the country’s banking sector and the economy as a whole, could be a fresh hurdle towards Zimbabwe’s quest to get fresh funding and lines of credit.
Economist Prosper Chitambara said Zimbabwe’s ability to attract any new money and lines of credit from the IMF is dependent on whether the country pays its arrears to IFIs.
“The only concern on bond notes is the impact the announcement has had on banking sector confidence. Challenges in the financial sector have systemic implications on the economy in the sense that challenges in the banking sector could potentially derail any economic recovery efforts,” Chitambara said.
He said a strong banking sector is key to economic recovery and growth.
“A strong banking sector would guarantee our ability to pay off our arrears. The smaller banks that are not adequately capitalised could be in trouble and the bigger banks may weather the storm because of their strong capital positions,” Chitambara said.
Economist John Robertson said introduction of bond notes was one of the many measures by the central bank to plug illicit financial outflow.
He said the likely impact of introducing bond notes, coupled with the question of government’s import priority list, could be a stumbling block to attracting new lines of credit and foreign investment.
“Introduction of bond notes undermines confidence and is not doing us any favours at all,” Robertson said.
“The US$200 million is very small and will be released in tranches over a period of about 10 months. The more important thing to me is the issue of the priority list on imports which is also tied to the US$200 million and export incentives. Where are the foreign earning going and how much of that will go to the private sector?”
Another economist Tapiwa Mashakada said the introduction of the bond notes posed a new threat to the banking sector and undermines the IMF’s confidence in Zimbabwe.
“The IMF is likely to demand that the printing of the bond notes goes ahead provided the German printers are audited and also the US$200 million line of credit is actually approved by Afrexim Bank short of which the IMF will not endorse the bond notes,” Mashakada said.
“The solution for me is to adopt the South African rand right away as the anchor currency. Adopting the rand as the legal tender for Zimbabwe will increase money supply and reduce externalisation and capital flight which is induced by arbitrage and premiums from the depreciation of the rand against a strong dollar.”
Mashakada added: “It is common knowledge that South Africa is Zimbabwe’s largest trading partner.
“Zimbabwe imports almost 60% of its goods from South Africa and exports about 30% to the country. The other 10% of exports is spread to other countries. So why not use the rand altogether?
“Naysayers argue that Zimbabwe will lose control of its monetary policy to the Reserve Bank of South Africa. So what? Since we dollarised, the RBZ lost its monetary policy functions anyway. All we want is an arrangement that will increase the availability of the currency and allow our industry to retool.
“Adoption of the rand will catalyse the process of macro-economic convergence. This entails the harmonisation of financial and economic benchmarks such the budget deficit, exchange rate.”