Bond notes seen driving inflation into future

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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

Should government start printing more bond notes than it has backing for in US dollars in order to stimulate economic activity, the risk exists that the bond notes will lose value fairly quickly, which would put upward pressure on the domestic price level.

ZIMBABWE’S controversial bond notes are seen driving inflation into the future and have already been blamed for rising inflationary pressures at the end of 2016.

By Taurai Mangudhla

The central bank introduced bond notes late last year, which it claimed was backed by a US$200 million Afreximbank facility, to ease the cash crisis that started ahead of the 2015 festive season.

The bond note which are also an export incentive could be driving inflation amid fears the Reserve Bank of Zimbabwe (RBZ)’s decision to increase withdrawal limits of the surrogate currency in December 2016 with a view to improving the country’s cash crisis caused a rise in inflationary pressure.

The bond notes, trading at par with the United States dollar, were also meant to ease the cash crisis that saw long queues at banks while citizens struggled to make transactions due to the unavailability of cash as the United states dollar which dominates Zimbabwe’s multiple currency regime continue to be externalised.

In early 2016, RBZ governor John Mangudya said the country could have lost about US$2 billion through externalisation in 2015.

Month-on-month inflation rate in December 2016 was 0,06%, gaining 0,04 percentage points on the November rate of 0,02% while the year-on-year inflation rate stood at -0,93%, gaining 0,16 percentage points on the November rate, according to figures obtained from the Zimbabwe National Statistics Agency (Zimstat).

Oxford University’s research unit NKC African Economics said the rise in inflation could be attributed to bond notes.

“That said, we believe the rise in price pressures could be attributed to the decision by the RBZ to increase the bond note withdrawal limits to US$100 per day and US$300 per week during December 2016,” NKC said, adding “This decision, made in order to allow consumer access to additional funds during the festive season, would ultimately have helped unleash pent-up consumer demand, in turn adding upward pressure on domestic prices.”

NKC said the RBZ made $1 bond coins and $2 bond notes available in November and is planning to release $5 bond notes in March this year. Recently, the central bank said $79 million worth of bond notes had been put into circulation.

“Should government start printing more bond notes than it has backing for in US dollars in order to stimulate economic activity, the risk exists that the bond notes will lose value fairly quickly, which would put upward pressure on the domestic price level,” NKC said. Predictions of growing inflationary pressures come after Finance Minister Patrick Chinamasa stated government expects inflation to average 1,1% in 2017. “That said, upside risks to inflation are significant,” NKC said. Going forward, it said, price pressures in Zimbabwe will continue to rise due to supply side constraints brought about by adverse weather conditions, foreign currency shortages and import restrictions.

“Food price pressures may, however, start to ease somewhat later this year. The Global Information and Early Warning System (GIEWS) predicts above-average rainfall conditions for the 2016/17 cropping season. GIEWS, however, does not foresee an increase in 2017 maize plantings, but does expect a higher crop yield due to improved weather condition,” NKC said.

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