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Bond notes: A banker’s view

By Clive Mphambela

Much has been said in the last weeks about the recent announcement by the Reserve Bank of Zimbabwe (RBZ), that it will introduce bond notes into the economy. The move, which has drawn immense speculation from a widespread of the citizenry, has also elicited a positive response from the central bank.

RBZ Governor, John Mangudya, unveiling new coins to the media.
RBZ Governor, John Mangudya, unveiling new coins to the media in 2014

The Bankers Association of Zimbabwe (BAZ), which represents all registered banking institutions in the country, also came out in support of the new measures.

We share today our understanding, as the BAZ, of the cocktail of measures recently announced by the governor of RBZ John Mangudya, which we believe will go a long way in addressing the cash shortages that have been experienced in the economy, while simultaneously stabilising and stimulating the productive economy.

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In short summary, the various policy measures are in the main, meant to:

●Resolve the current cash shortages and ensure the efficient allocation and use of foreign exchange resources.

These measures are also targeted at stemming the high levels of unauthorised externalisation of currency, an activity that has contributed significantly to the current cash shortages. It is no secret that banks have been importing large amounts of brand new United States dollar (USD) notes at great cost, but these, once withdrawn from the banking system are being quickly externalised. As a result cash for transactions was increasingly leaking from the system.

●Strengthen the multi-currency system by increasing the availability, and the widening use of alternative currencies that are part of the multicurrency basket.

Through the addition of the South African rand and euro to the range of cash notes that can be used in the economy, the measures will potentially reduce the demand for USD notes and reduces the dominant share of the USD in the multi-currency basket. The RBZ has observed that this concentration risk on a single currency was a cause for concern and a source of inconvenience for the transacting public. The use of other currencies in the multi-currency basket will reduce some of the pressure.

●Introduce bond notes as an incentive to exporters

The bond notes will be issued at the request of the banks on behalf of exporting clients, who will have received export proceeds via the bank. It is anticipated that these export incentives, which will be paid to exporters in the bond notes, will enhance the competitiveness of exporting companies. Exporters will earn between 2,5% and 5% of the value of export proceeds as additional revenue.

●Incentivise the local production of goods and services in order to reduce the need to import those goods and services that can otherwise be locally produced.

The priority list of imports will reduce the level of unnecessary imports into the country and naturally incentivise local production of certain goods and services that are being needlessly imported. Stimulating local production should result in job creation and stem liquidity leakages through imports.

●Promote the widespread use of electronic platforms for settling domestic transactions across all forms and sizes of businesses; that is, the use of point-of-sale machines to conduct all transactions in USD, euro and rand.

The RBZ policies have also taken aim at promoting the greater use of alternative payment platforms in lieu of cash for many forms of business transactions. Banks are also responding to these measures by endeavouring to ensure that point of sale devices are deployed as widely and as efficiently as possible.

●Promote a savings culture by encouraging the payment of positive rates of interest on savings and fixed deposits made with banks for periods that extend beyond six months.

The RBZ is encouraging the use of formal savings tools by stipulating that fixed deposits of tenures of six months and above earn significantly higher rates of interest. This should result in the growth of savings.

Will bond notes undermine the economy?

Banks have understood that bond notes are not being issued to replace or undermine the multi-currency system, but rather, are being issued as an incentive to promote exports. Business will still be conducted on the basis of the basket of multi-currencies.

It is the bankers’ view that the policy has been introduced by the RBZ, not only to successfully deal with the current cash shortages in the economy, but also to stabilise and stimulate the economy through the promotion of exports.

The combined effects of the cash withdrawal limits, the wider use of plastic money and alternative currencies, the limits placed on the exportation of cash, and the incentives on exports should all result in a rapid improvement in liquidity in the economy.

●Clive Mphambela is a Banker. He writes in his capacity as Advocacy Officer for the Bankers Association of Zimbabwe. BAZ expressly invites other stakeholders to give their valuable comments and feedback related to this article to him on [email protected] or on numbers 04-744686, 0772206913