RBZ set to inject more bond notes

By John Kachembere and Ndakaziva Majaka

Government is set to inject more bond notes into the system in what is likely to significantly ease the cash crisis with negotiations for a top-up of the initial $200 million facility now at an advanced stage, the Daily News can exclusively reveal.

Without disclosing the figure being negotiated for, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya, told the Daily News in an exclusive interview on Sunday that the plan to top-up the initial $200 million Africa Export Import Bank (Afreximbank) facility that backs the surrogate currency was definitely in the pipeline.

Zimbabwe is currently in the throes of a biting liquidity crisis, with government hoping an increase in bond notes — introduced in November last year — will boost the country’s low liquidity ratios.

“We are currently in negotiations with Afreximbank to give us another facility. We have to ensure that whatever we issue as bond notes need to be secured by a foreign currency facility and we will continue with our drip-feeding mechanism.

“I cannot say the figure because we are still negotiating and we will come back to you when we finalise the deliberations,” Mangudya said.

This comes as Afreximbank president Benedict Orama recently said the institution would continue to help Zimbabwe — which to date has drawn down over $160 million from the facility to give incentives to exporters and help deal with its liquidity challenges.

In the wake of the severity of low liquidity — as Zimbabwe currently only has an estimated $300 million in cash circulating in the market — estimates indicate the country needs close to $1 billion in the economy to maintain adequate liquidity ratios.

Bond notes have been steadily vanishing from the local market on the back of currency dealers who are either hoarding them for speculative purposes or taking the surrogate currency into the black market.

The bond notes have found new homes in neighbouring countries such as Botswana, South Africa, Zambia and Mozambique, despite efforts by the Zimbabwe Revenue Authority and the central bank to curb their externalisation.

The parity of the notes — which are officially pegged at par with the United States dollar — has made the currency attractive in the region where relatively weaker currencies trade.

Mangudya, who said he was “happy” with the way the bond notes have been operating, said the scarcity of the notes was being fuelled by people hoarding them for purposes of storing of value.

“Bond notes are a medium of exchange and one of the fundamental characteristic of a medium of exchange is that it should be acceptable, store of value and all those qualities have been exhibited in the market.

“Where we are only concerned is that money is not circulating. Apart from the issue of fiscal deficit, if money was circulating in this economy it would be sufficient.

“The United States dollars, the bond notes are not circulating because people are taking them as a store of value and not as a medium of exchange; and also because of rent-seeking behaviour, which is indiscipline. People should deposit their money in banks to encourage circulation, not to sell money to make money,” Mangudya said.

However, the International Monetary Fund (IMF) recently warned that government’s introduction of bond notes to address a relentless cash crisis was fuelling a currency black market — which had been subdued due to a multiple currency regime — cautioning against exceeding the $200 million threshold.

Year on year inflation rose from -0,7 percent in January 2017 to 0,31 percent in June 2017 and the IMF has also 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, if bond notes exceed their initial $200 million cap.

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.

International research firm, NKC Economics (NKC) has also warned the RBZ against exceeding the $200 million maximum limit or risk plunging the country back into the dark days of 2008.

“Should authorities indeed start printing more bond notes without these notes being backed by foreign exchange, it would certainly add upward pressure to the domestic price environment.

“More information is, however, needed before drawing any conclusions, as it might be that the apex bank intends to back the new bond notes through new debt accumulation — the recent clearance of multilateral arrears should improve Harare’s chances of accumulating additional debt,” said NKC.

Adding a voice to calls for the RBZ to avoid over-printing bond notes, NKC economist, Jared Jeffery, recently said the RBZ may be forced to monetise fiscal deficit towards the 2018 elections.

Monetised deficit is when government prints money in order to pay its deficits.

“ . . . That said, upside risks to inflation are significant. Should government start printing more bond notes than it has backing for in US dollars in order to stimulate economic activity, the risk exists that the bond notes could lose value fairly quickly, which would put upward pressure . . . ,” Jeffery said.

Meanwhile, Mangudya said it remained possible for the country to get out of the current cash crisis and improve our foreign currency receipts.

“Zimbabwe is a very isolated country. We only have about two or three banks throughout the whole world than can finance us. The rest see Zimbabwe as a high risk country, as a result our access to foreign currency is so minimal.

“Other countries have access to foreign finance but Zimbabwe cannot access because of isolation and sanctions and that is a fact. Between 2008 and to date, we have lost about 50 corresponding banks as a country because of compliance issues and sanctions.

“The contradiction is we are using other people’s currencies but have no access to foreign finance, so it means we need to generate it, we need to make it ourselves through increased exports,” said Mangudya. Daily News