GOVERNMENT has been advised to either demonetise bond notes or allow the fiat currency to float as a means of addressing financial market distortions in the country, a study paper by the Zimbabwe Economic Policy Analysis and Research Unit (Zeparu) has revealed.
By Kudzai Kuwaza
The bond note was introduced in 2016 by the Reserve Bank of Zimbabwe as part of measures to address the liquidity crisis and pegged at par with the United States Dollar.
This has, however, worsened the distortions in the market and has instead fueled the black market as the disparity between the surrogate currency and the greenback continues to widen.
Presenting the draft paper analysing financial market distortions last week, consultant and economist Abel Sanderson,said dealing with the distortions created by bond notes was one of the policy options government could take to restore financial stability.
He said the pronouncement by the central bank that the bond note is trading at par with the US dollar was ‘‘out of sync with reality”.
Sanderson said that the other policy options that had been proposed in their analysis include curbing excessive government borrowing and limiting the roll-over of Treasury Bills (TBs) which has crowded out the private sector.
The study, Sanderson said, noted that the issuing of the TBs on private placement instead of going on auction created a skewed economic framework. The issuing of TBs with the same features but different rates also contributed to financial distortions in the country, the analysis found.
The analysis, Sanderson said, established that the major sources of distortion include failure by government to provide a stable currency and intervention in relation to price support mechanisms.
The paper also highlights government’s failure to regulate competitive market behaviour.
Sanderson said the analysis found that the absence of merchant banks, discount or finance houses in the market are an indication of the financial distortions.
The lack of a comprehensive credit registry, Sanderson added, has deprived the economy of a robust credit guarantee system.
Sanderson said the disproportionate increase in real-time gross settlement balances is not consistent with the actual money balances in the economy, giving rise to inflationary pressures.
The study was based on interviews carried out in Harare, Bulawayo, Gweru and Masvingo. Among those interviewed for the paper are business management organisations, small-to-medium enterprises, academia and financial market players.
The study was funded by the African Capacity Building Foundation (ACBF).
Meanwhile, Zeparu executive director Gibson Chigumira said the research body is currently working on a study paper on distortions in the country’s employment market.
Zeparu is an independent institution established by the government and the ACBF in 2003 to conduct evidence-based policy analysis and capacity that feeds into the public policymaking process.