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Bond notes fuel inflation: IMF

Government’s introduction of bond notes last year to address a relentless cash crisis fuelled a currency black market, which had been subdued due to a multiple currency regime, the International Monetary Fund (IMF) has indicated.

A man protests over the state of the economyWilfred Kajese/ AFP
A man protests over the state of the economyWilfred Kajese/ AFP

Bond notes, described by government and the central bank as a surrogate of the United States (US) dollar and backed by a $200 million facility from the African Export and Import Bank (Afreximbank), have largely been viewed as a return of the Zimbabwe dollar, abandoned in 2009 after being decimated by hyperinflation.

Introduced in November last year, bond notes — one of several government interventions meant to inject liquidity into the cash-starved economy — have already seen the return of inflationary pressure in the economy.

Year on year inflation rose from -0,7 percent in January 2017 to 0,75 percent in May 2017.

The IMF warned that inflation and inflation expectations would rise in line with money creation, with annual average inflation set to reach between two and three percent.

“The use of bond notes and RTGS (real time gross settlement) electronic balances, officially at par with the US dollar amid capital flow controls, is giving rise to a parallel market,” the IMF said in its Article 1V Consultative report issued last week.

The Bretton Woods institution said bond notes had “reduced the pace of economic transactions …at the cost of driving US dollars out of circulation”.

“With bond notes and electronic balances utilised for the bulk of payments, and T-bills (Treasury Bills) for a few others, US dollars are used for international operations and hoarded as a store of value outside the formal banking system. The expanding informal sector functions using cash to finance imports that reportedly evade government controls and customs,” the IMF noted.

The IMF said in the parallel market, bond notes were trading at a five to seven percent discount to the US dollar, and electronic balances reportedly exchange at a 15 to 20 percent discount.

The Washington-headquartered lender said combined with the trade controls, the discounts had led to an uptick in inflation, which has increased to a quarterly annualised rate of 3,4 percent in March 2017, compared to 0,7 percent in December 2016.

The IMF said government was likely to finance its deficits by expanding the RBZ overdraft, issuing T-bills, and “supplying bond notes at an increasingly high cost”.

“This would lead to rapidly rising inflation, growing shortages of foreign exchange and imported goods, and increasing discounts of the quasi-currency instruments. The deteriorating situation would exert a heavier toll on the most vulnerable, and the resulting growth slowdown and collapse in confidence could lead to financial sector distress and social tensions,” said the IMF.

Meanwhile, government’s appetite for money creation is increasing, with the latest being the issue of $600 million worth of T-bills to pay debts owed to power utility Zesa by State enterprises.

This is despite Finance and Economic Development Minister, Patrick Chinamasa, warning that further injection of T-bills would have dire consequences on the economy.

“Government remains fully cognisant of the need to effectively manage risk that is associated with over issuing of T-bills in the market and the implication that it may cause,” said Chinamasa in April. The Financial Gazette