RESERVE Bank of Zimbabwe (RBZ) governor, John Mangudya, has insisted that he will press ahead with plans to launch bond notes despite public disapproval, with the surrogate currency expected in the market at the end of October.
About US$75 million worth of bond notes will be pumped into the monetary system by the end of the year.
The bond notes are said by the RBZ to be part of an export incentive meant to curtail the export of hard notes from the economy, which is currently grappling with a liquidity crunch.
Mangudya said: “The RBZ introduced the performance related export bonus scheme of up to five percent to be awarded to exporters of goods and services to address the challenges of low productivity and promote exports with the overall aim of liquefying the multi-currency exchange system. The bond notes will be gradually released into the economy in sympathy with export receipts through normal banking channels up to a maximum ceiling of the facility of US$200 million.
“The ceiling would be attained when total exports are around US$6 billion. At the rate at which the country is exporting and based on (available) statistics, we anticipate that bond notes equivalent to around US$75 million will be in the market by the end of December.”
The announcement immediately triggered disquiet among Zimbabweans, who said the decision could deepen the country’s economic woes.
They said bond notes would mark the return of the Zimbabwe dollar, which was abandoned after it suffered severe assault from a hyperinflationary crisis.
There has been an increase in bank queues as Zimbabweans try to get their hard-earned money in US dollars before the introduction of bond notes.
Analysts told the Financial Gazette’s Companies & Markets that the bond notes would not only be used for payment of export incentives as initially suggested but would be used to boost liquidity in the market.
The bond notes would trade at the same rate as the United States dollar.
Mangudya said the bond notes are supported by a US$200 million facility by the African Export and Import Bank (Afreximbank).
The payment of the incentive would be made in bond notes which would be redeemable from any bank for US dollars on demand, he said.
Mangudya said the bond notes would be initially released in smaller denominations of US$2 and US$5.
Mangudya said: “The bank has… taken note of the public’s concerns, fear, anxiety and scepticism of bond notes which all boils down to the general lack of trust and confidence within the economy.
“The bank is addressing the concerns by planning to introduce smaller denominations of bond notes of US$2 and US$5.
“In addition, the bank has proposed for the setting up of an independent board to have an oversight role on the issuance of bond notes in the economy.”
Mangudya said it was “critical to emphasise that the introduction of bond notes does not mark the return of the Zimbabwe dollar through the back door”.
“The macroeconomic fundamentals or conditions for the return of the local currency are not yet right to do so,” he said.
But still fears abound that the currency could be printed in huge volumes to help government pay its debts.
Moreover, government has previously reneged on its own commitments and could not be trusted on its promises on the bond notes, said analysts who spoke to this newspaper.
They also said the bond notes would unlikely sustain the purported value against the US dollar.
This is likely to spark a renewed run on banks as depositors try to withdraw their savings ahead of the introduction of the bond notes.
Economist, John Robertson, said: “(Mangudya’s) walk the talk theme is perhaps too gentle criticism that government hardly ever keeps its promises. In his policy advice, the governor offers extremely good suggestions, but the implications all the way would depend upon government creating a much more investor-friendly environment, which is repeatedly promised, but not delivered.”
Robertson appeared to suggest that the monetary policy would be ineffective due to a reversal of fiscal policy decisions made a week earlier.
“The RBZ measures need to be aligned to the fiscal policy measures presented by Finance Minister (Patrick Chinamasa). And the minister’s proposals have already been rejected. We now need “what next?” statements from the minister and the governor,” said Robertson.
Chinamasa was humiliated for proposing to cut civil servants salaries and wages and suspend the government workers’ 13th cheque.
He had also proposed the rationalisation of the bloated public service.
Mangudya said many other policy changes had been proposed but no progress has been made in implementing them.
Robertson said the central bank’s report carried many useful statistics “but it repeats the Minister of Finance’s claims that growth is being achieved in the gross domestic product (GDP) this year”.
“The forecast of 1,2 percent for 2016 appears to depend upon very large increases in gold and platinum output in the second half of the year and on the growth that the ministry expects to see in finance and insurance, construction, real estate, transport and education. Regrettably, none of these seem likely to add to GDP this year and some could end the year with negative numbers instead,” he said.
“The repeated claims that GDP will grow this year undermine the credibility of both reports.
“Now, with the promises that more than US$200 million would be used to back bond notes, government’s repeated failure to keep its promises in the past made the population to severely distrust the government on this issue too,” he added.
In recent months government has faced its worst public protests over a deteriorating economic situation.
The injection of bond notes into the economy could trigger more unrest in the country, given that some protests were in opposition to the introduction of the bond notes.
Mangudya indicated that Zimbabwe’s economy had continued to be affected by sustained mismatches between export receipts and imports as evidenced by the disproportionate import absorption relative to exports, especially for the period 2008-2015.
This, he said, was a sign of weak economic fundamentals and over liberalisation of current and capital accounts.
Over the period January to June this year, merchandise exports declined by 8,7 percent from US$1,232 million realised in 2015 to US$1,125 million in the corresponding period in 2016.
Similarly, merchandise imports for the period January to June 2016 amounted to US$2,496 million, a 14,4 percent decline from US$2,917 million realised over the comparative period in 2015.
The decline in export and import performance is a reflection of the overall slowdown in economic activity, emanating from the drought induced contraction in agriculture, depressed commodity prices, suppressed capacity utilisation in the manufacturing sector, as well as continued difficulties in accessing external lines of credit.
But the prioritisation of imports announced by the RBZ in May this year and restrictions on selected imports by the Ministry of Industry and Commerce in July 2016 as well as the effects of a stronger US dollar on the country’s terms of trade are expected to lead to a 0,9 percent decline in the import bill in 2016.
Mangudya indicated that continued reliance on imports of finished goods is unsustainable as it undermines current efforts to resuscitate domestic industrial production, leading to significant trade and current account deficits.
Mangudya said to transform the economy, the country needed to do things differently and walk the talk.
He warned the economy was hungry for production and productivity.
He also decried the public sector wage and salary bill which gobbles more than 90 percent of the country’s total revenue.
He said business climate had been affected by limited access to offshore funds and high interest rates on borrowings.
Although the central bank has engaged the banking sector to reduce lending rates to a maximum of 15 percent, some banks are still lending at rates above the agreed threshold.
Microfinance institutions are also lending at high interest rates of over 20 percent.
The central bank has directed these to reduce the interest rates to a maximum of 10 percent per month from the beginning of October this year.
Source-Fingaz
