There has been a specific acknowledgement by the monetary authorities that the parity level of the bond notes against the greenback has been upset.
By Daniel Ngwira Chartered accountant
The monetary authorities are referring to this as a scarcity premium, most probably to isolate the main cause of the premium.
It is most likely not being caused by excessive printing of the bond notes, as they too, appear to be in short supply. This is fundamental in that one of the selling points of the bond notes was that it would be at par with the United States dollar.
Many doubted this on the basis that in the past, the Reserve Bank of Zimbabwe (RBZ), had failed to exercise restraint and discipline in the run up to the fateful year 2008.
This time around, while the central bank seems to have struck the right chord with regards to discipline, the odds are against the it in that what is weighing down the value of the bond note against the greenback is the massive shortage of foreign currency. This is largely caused by an economy that is not performing, while also saddled with high government expenditure and a huge import bill.
The RBZ attributes this shortage to many factors, including that, unlike in many other countries, economic players are using foreign currency for day-to-day transactions.
This is disputable. Statistics show that most of the transactions are now being conducted on real time gross settlement system (RTGS), mobile and card transactions.
According to the RBZ, for the six months that ended June 30 2017, RTGS transaction volumes were recorded at 2,5 million with a value of US$27,4 billion.
This accounted for at least 70% of all the transactions in the economy. Further, RBZ reported that digital forms of payment grew 131% in volume and 23% in value. This demonstrates that the public is fast embracing the alternative forms to cash.
Economic players in Zimbabwe have considerably adopted the RTGS, plastic money and mobile money transfers as media of exchange.
Even with this development, the shortage of foreign currency and cash appears to be worsening. So what could be the main driver of this predicament?
As the introduction of bond notes sparked debate just about a year ago, the central bank chief John Mangudya stated that there would be a board established to oversee the printing of the bond notes to give assurance to the general public that RBZ was not printing any more bonds notes than the initial $200 million which had been promised and designated.
This has not happened. Zimbabweans expressed scepticism about the introduction of the bond notes as they felt it was the re-introduction of the local currency through back door.
There was a general belief that the central bank would not be able to control its excitement regarding the printing press as had happened during the days we had our own currency.
The absence of this board and the absence of any explanation on why the board has not been appointed continues to unsettle market players who have been following the bond note developments with keen interest.
It should, however, be stated that the absence of this board, which had been promised by Mangudya, is contributing to the immense cost of running the bond notes as legal tender and local currency. The board, suppose the appointees were not to be seen as political sympathisers of the existing government, would have assisted in bringing confidence to the market, regarding the bond notes and ultimately the entire cash crisis.
It would have assisted in rendering the backing of the notes unimportant and more than anything could have been a key tool in trying to explain to the central bank that there was no need to back a currency if the market participants were not going to be allowed to exercise convertibility.
The current scenario gives an impression that there could be a mismatch between the notes in circulation and the level of backing or that the notes might not be backed by anything after all.
The RBZ might be contributing to the cash crisis by denying holders of bond notes to exercise a derived right to convert their holdings of their bond notes to the US dollar as they wish. If the apex bank allows conversion of the bond notes into the US dollar, it would give confidence to market participants and as a result, very few people would be willing to convert, as they would have built confidence that convertibility is a reality.
The key reason why the dollar bond note parity level cannot hold is because the pricing is inappropriate for the circumstances. The central bank has helped in erecting a shadow market, which can be called a black market or a parallel market.
In this instance, regulation has imposed a price ceiling, which requires that the seller of a US dollar should not receive any more than one bond note. Due to the existing shortage of foreign currency, particularly the dollar in our market, sellers of dollars do not deem the current pricing system as fair under the circumstances.
But economic theory guides us on the consequences of price ceiling on markets and their efficiency. Price ceilings create shortages and long queues for products, where they are below the equilibrium level. The lower cost imposed by government manifests in the higher cost in terms of the shortages and long queues people stand in trying to access the product or service at the new stipulated prices.
There is also a likelihood that sellers could erect some charges and commissions that essentially would raise the full price or total cost to the customer beyond the price ceiling and even beyond the market equilibrium level.
Between 2000 and 2004, banks in Zimbabwe came up with ways to circumvent market controls on currency trading, as they were seen to be complying with regulation by trading at the official exchange rate, while in fact, the total cost to the customer was the equivalent of the parallel market price.
This was done through charging commissions to customers. Some banks even went further by creating alternative operating systems, whereby they would record the transactions which had been done at parallel market rate.
This was meant to circumvent regulation; transactions done at the official rate would be captured in one system, while transactions posted above this would be recorded in a different system, which would only be accessed by a designated group of officials.
Price ceilings discourage suppliers from selling their products at the new going rates, as in many cases that price would either reduce their profits or would eliminate them all together.
In our instance, market players are fully aware that the united states dollar is in high demand as players seek to import raw materials or buy outside the country with a view to restock.
As such, they are demanding a higher price for their dollars short of which they would withhold their dollars for future use or when the market is ready to accept an appropriate price.
Authorities need to understand that price is not just a number determined by the desire to hold on to an untenable and unrealistic parity level or a number that one feels is emotionally right.
Price is an important number which is determined by the cost of production or acquisition. Above all this, prices are determined by market forces. This explains why some products are sold at a loss in the short-term, as firms try to cover their variable costs. When your cost of production is 30 cents per unit, if there are takers at only 20 cents, you have to sell at that rate or else close shop. No one has ever succeeded in forcing the market.
Pricing is used in allocating resources efficiently. Without pricing, allocation of resources becomes difficult and inefficient and issues of favouritism would come into play. Equally, an inappropriate price imposed by the regulators creates problems for the market in the form of shortages and premium prices which are designed to circumvent regulation. This is what the 1:1 dollar bond note pricing has done in the last few months. It was clear from the onset that this rate would not hold.
Sadly, the authorities have not learnt a thing regarding currency pricing controls.
The previous controls helped create unjustified wealth for the connected when the US dollar was pegged at Z$824 for a long time. In the process, producers suffered as they were sourcing the currency at a higher rate than the official. This is not the only problem; in most cases shadow markets tend to charge prices that are higher than the equilibrium level. As a result, shareholders’ wealth is destroyed.
Essentially, price controls are an obstacle to the efficient allocation of productive resources as they alter the incentives of market forces. These distortions result in production levels which differ from that of an unregulated market. We are familiar with these in our market.
When the National Income and Pricing Commission (NIPC) slashed prices in 2007, what followed was a massive shortage in the goods and services. In fact, those who remember well would know that it was this decision by the NIPC which resulted in the incapacitation of Makro, before it was later on taken over by OK Zimbabwe.
Overnight the wholesaler was turned into an empty hall, as numbers flocked to buy at the low prices which had been pronounced by the commission when, in fact, inflation had become rampant at that time.
To address to dollar bond note pricing, the RBZ should price the dollar in terms of the bond note appropriately or allow it to float.
This should be simple enough rather than resorting to arrests. Arresting people will not resolve the underlying problem, in fact, it could fuel the currency crisis and therefore the rates could go wilder.
Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — firstname.lastname@example.org/ cell: +267 73 113 161.