Bond notes: What could go wrong?

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A Zimbabwean man shows off new bond notes outside a bank in Harare on November 28, 2016. Picture: Philimon Bulawayo/Reuters

Seldom are problems solved permanently. Quite often, the tendency by policy makers is to fixate short-term solutions to permanent problems, only to re-emerge a few months or years later.

New Perspectives with Persistence Gwanyanya

The bond notes solution to the country’s cash crisis is no exception to this assertion. The surrogate currency could be effective in minimising the occurrence of externalisation, but may be inadequate to provide a permanent solution to the country’s cash challenges. Long-term solutions to Zimbabwe’s cash challenges should be premised on economic rebalancing — increasing production and exports while reducing consumption and imports. This should be supported by policies to attract capital, both domestic and external. However, all economic rebuilding efforts could be weighed down by the corruption endemic, which has taken root in the Zimbabwe economy. The need for policymakers to exorcise the demon of corruption cannot be overemphasised.

Now that the bond notes have been issued, there is need to envision what could go wrong with the surrogate currency.

The biggest fear is the re-emergence of the black market, which will worsen the country’s cash situation. There are some unscrupulous elements that are working tirelessly to counterfeit the bond notes. If not managed properly and supported by efforts to rebalance the economy, the whole issue could degenerate into shortage of basic commodities and accelerate the general economic decay. Indications on the ground are that little precious action is happening to put the real economy on a sustainable growth path.

Risk of counterfeiting

The advancement in technological innovation increases the risk of counterfeiting. The impact of bond notes would be more extensive in Zimbabwe as foreign currency is readily available in the economy, being the transacting currencies. There is high risk that the counterfeits could replace a significant amount of foreign currency, especially the attractive United States dollars, thereby worsening the country’s cash challenges. The revelations that some unscrupulous elements tried to counterfeit the bond notes before their introduction are worrying.

The Reserve Bank of Zimbabwe (RBZ)’s strategy to reveal the security features of the bond notes simultaneously with their introduction, ostensibly to minimise counterfeiting, could not be a permanent solution to this problem. This activity is usually an inside job perpetrated by the influential and well-connected elements. There seem to be no convincing measures by the RBZ to minimise the risk of counterfeiting, save for small denominations of US$2 and US$5, which make it less economical to counterfeit.

Re-emergence of parallel market

There is a constituency that is betting on arbitrage opportunities that might arise from the new monetary system.

Shortage of foreign currency will make it difficult to keep the parallel market for currencies under check. What would be important is to minimise the extent of this nefarious activity. There is a high risk that a culture of arbitrage that emerged prior to the introduction of bond notes could be carried into the new monetary regime.

Some unscrupulous retailers are charging higher prices on electronic payments compared to cash payments. Others are even selling cash at a price as high as 15%. The re-emergence of a black market will largely be dictated by the interplay between demand and supply forces of foreign currency.

The current supply constraints typified by mounting foreign payment backlogs favours the re-emergence of a parallel market. Shortages of foreign currency would mean that those with access to the scarce commodity would get it at par to the US dollar in the official market, and use the same to fuel the black market.

The RBZ’s efforts to negotiate a US$150 million nostro stabilisation facility have to be commended. This facility will go a long way in replenishing the banks’ nostro balances and assist in easing the foreign payments backlogs.

However, the said facility constitutes debt, which would need to be repaid at some point in future. Common knowledge tells us the bond notes would only proffer a sustainable solution to the country’s cash challenges when the cost of facilities supporting them outweigh the benefits of these facilities.

This makes economic rebalancing imperative. The country should urgently start to grow foreign currency stocks through increased exports whilst minimising leakage of the scarce commodity through imports and externalisation.

Back to the real economy

Bond notes are the only monetary instruments available to solve externalisation but will not solve the country’s cash challenges. Rebalancing the economy is the only long-term solution to the current market challenges. There is need for increased production and exports in a sustainable way. This should be rebalanced by a reduction in consumption and imports.

It is a pity that during the six months when the country was debating the bond notes, government ministries charged with the responsibility of growing the real economy seemed to have gone on leave. Even Statutory Instrument 64 of 2016 seems to be failing to hold water.

The need to re-industrialise to boost local production and exports cannot be over emphasised. However, re-industrialising Zimbabwe will largely depend on the policies to attract both foreign and domestic capital for retooling and technological upgrade.

A country can only re-industrialise successfully when it is supported by investment in infrastructure. It is estimated that the country has an infrastructure deficit of between US$14-US$20 billion, which needs huge inflows of capital mainly Foreign Direct Investment (FDI).

However, capital only flows where there are sound policies to attract and retain it. There may be a need for vigorous economic and structural reforms in Zimbabwe, supported by improvement of the ease of doing business.
Otherwise, the bond notes may not be able to rescue the economy from the current cash crises.

Corruption remains unchecked

Corruption is a cancer that will weigh down the success of bond notes. If it continues unchecked, corruption could be a serious threat to the current efforts to rebuild the economy. RBZ reports that an estimated US$1,8 billion was externalised by individuals (US$600k) and corporates (US$1,2 billion) in 2015. Surely, if the RBZ has these records, it would be better to increase surveillance on individuals and companies suspected to be agents of this malpractice.

Quite clearly, the general public neither has the means nor capacity to externalise. Such behaviour can arguably be traced to the rich, well-connected and influential members of the society. If bond notes are not supported by measures to eliminate and discourage corruption, then they will be a total disaster as externalisation will remain in practice.

Possibility of a deeper crisis

Economists often say solutions to a crisis often sow the seeds for another crises. The real economy is unlikely to step up to the plate,due to deep-seated economic and structural constrains. Despite the current state of affairs, there seems to be little action to solve the economic and structural challenges that confront the economy today.

The worst case scenario is for the current crisis to degenerate into a shortage of basic commodities. Right now some fuel companies are starting to experience challenges in importing fuel. Shortage of oil is impacting on oil expressing companies in Zimbabwe, despite protection offered to the subsector by SI 64 of 2016.

Zimbabwe’s hope is now pinned on command agriculture, whose success would see an improvement in the supply of raw materials to the country’s manufacturing sector.

Sadly, little is being done to curtail corruption, which is a threat to any economic recovery effort. The porous exit points will not help the situation as externalisation would continue even after stricter capital controls were instituted. The road ahead is tough and long. There is a need to summon a new spirit of work and sacrifice to confront our challenges head-on otherwise the economy will sink into a deeper crises characterised by shortages of both cash and basic commodities.

Gwanyanya is an economist and banker. He is also a member of the Zimbabwe Economics Society. The New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com Cell +263 772 382 852.

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