RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya is this month expected to announce a raft of measures in his Monetary Policy Statement to stimulate production and improve confidence in the banking sector against a background of the introduction of bond notes which has sparked anxiety among depositors.
Mangudya’s options remain limited largely due to a handicap stemming from the country’s 2009 decision to adopt a multiple currency regime, taking away some of the key monetary policy instruments from the central bank. This has significantly stymied the effectiveness of the monetary policy as the country relies on foreign currencies.
Zimbabwe in 2009 adopted a multi-currency regime that was dominated by the United States dollar which limited the central bank’s monetary policy instruments. The game is different in 2017 after Mangudya introduced bond notes which were smuggled into the market as an incentive of up to 5% for exporters, backed by a shadowy US$200 million Afreximbank facility. The term sheets of the Afreximbank facility have not been made available.
The central bank announced recently it had put into circulation US$79 million in $2 denominations of bond notes whose value is at par with the US dollar. Local media recently said Mangudya wants to unveil the $5 denominations of the bond notes by March this year.
This comes amid concern the RBZ could release more than the US$200 million. As such, one of Mangudya’s tasks is to quash fears the RBZ will pour into the market more than the US$200 million and cause inflation. Memories of the hyperinflation era and the accompanying hardships which peaked in 2008 are still fresh in the minds of most Zimbabweans, hence the deep concerns.
Among Mandudya’s priority areas is the state of the financial sector, given that some banks closed in recent years while others are struggling to survive due to a liquidity crunch that culminated in a cash crisis. Bank queues, which had become the order of the day owing to the cash shortages, are slowly disappearing as citizens are forced to adopt plastic and electronic money.
Analysts say the bond notes have been forced on desperate citizens who have no option but to accept the promissory currency for their cash transactions. Citizens have also been left with no option as automated teller machines and tellers are dispensing bond notes while the US dollar is becoming more scarce each day.
The health of the banking sector also remains a concern in the face of the risk posed by bond notes as excess supply of the surrogate currency can lead to inflation.
Due to a trade deficit, Zimbabwe has been failing to honour its foreign payments due to depleted nostro accounts which Mangudya must address. Last week, the Confederation of Zimbabwe Industries raised concern that banks were prioritising non-essential imports ahead of critical raw material required by the manufacturing sector.
Independent economist John Robertson said Mangudya has very little room to manoeuvre because the country is using foreign currency.
“A monetary policy is all about interest rates and exchange rates, but Mangudya won’t be doing much on the exchange rate side because we are not using our own currency,” Robertson said.
“On the interest rates, they remain a challenge although banks have to some extent complied with the RBZ directive to reduce lending rates. They, however, still remain unsustainable.”
Robertson said the country’s lending rates remain high enough to cause the collapse of companies due to unsustainable finance costs.
“It is the job for the RBZ and the ministry of finance to ensure lending rates do not affect industry and the economy in general. The country should reduce costs of money and remain competitive in general,” Robertson said, adding “reducing the cost of lending is about the only area government can control. However, the central bank has no money to lend to banks at lower rates, which makes it a difficult task.”
Zimbabwe has suffered huge non-performing loans (NPLs) in the past which have led to the collapse of a number of banks. The government had to create a vehicle to take over bad loans in order to free up the balance sheets of key industry players that were chocked by bad debt. The NPLs were partly attributed to high lending rates of up to 18% which were obtaining on the market.
Robertson said bond notes are a threat to economic and financial stability if mismanaged.
“Bond notes remain scarce because they have been released with some level of discipline and this is why they have a value. If that discipline breaks down, the value will break down. They must keep the maximum value of bond notes at US$200 million,” he added.
Economist and former economic planning minister Tapiwa Mashakada said the cash shortages remain a top priority for Mangudya to solve.
“The economy cannot grow without adequate liquidity. Point of sale machines (POS) have increased which shows that the public are forced by cash shortages to use plastic money,” Mashakada said, adding the country needs to build national reserves for sustainable long-term growth.
“The issue of national reserves has been neglected for too long. Three quarters of financial institutions are sick. He should address this crisis and, finally, the debt crisis is still outstanding,” he added.
Zimbabwe’s public debt had grown to US$11,2 billion as at October 2016 of which US$7,5 billion is external debt.
The debt situation is hindering the country from securing fresh lines of credit from international financial organisations and blemished its credit ratings.
Economist Vince Musewe said Mangudya needs to look at stimulating production.
“This means focusing on access to productive capital away from consumption,” Musewe said. “He also needs to deal with liquidity challenges and promote a move to a cashless society as well as address the debt overhang and resolve IMF arrears.”
Mangudya must ensure he deals with the trade deficit by way of reducing imports and increasing export earnings, Musewe said.
“He needs to make it easy for small businesses to access productive capital,” he added.