Sunday, May 08, 2016

Reserve Bank of Zimbabwe Governor Explains Bond Notes
Zimbabwe Sunday Mail
Dr John Mangudya

I sympathise with the people of Zimbabwe who have taken our policy pronouncements to address the US dollar cash shortages to anticipate that we are going to have a repeat of the economic tragedy of 2008.

What we went through in 2008 was difficult and we cannot forget it. As such, whenever we attempt to do anything, people immediately bring back horrors of that period. What I want to assure the nation is that things are not the same as 2008; we cannot have a repeat of that trauma.

The fundamentals of 2008 are not the same as now.

We are now in a multi-currency system so things are very different, and it is not proper to compare the two periods.

An important difference is that the 2008 period was characterised by hyperinflation, but our economy right now is experiencing the opposite of inflation.

There is no sign whatsoever that we are going to experience hyperinflation.

At present, our inflation is at -2,5 percent, which shows that there is a world of difference between what we had then and what is prevailing now.

We are using a basket of currencies that are not depreciating and cannot possibly depreciate at the rate that the Zim dollar was depreciating at that time.

I want to make a plea to the people of Zimbabwe not to be afraid; they should not have a negative perception all the time. We need to develop a positive attitude to this economy.

What we are trying to do is ensure the economy is stabilised and stimulated for the betterment of all Zimbabweans. So, the people of Zimbabwe should know that it is not correct to compare bond notes with bearer cheques from the Zim dollar era.

The bond notes are comparable to the bond coins, and these coins and notes are treated in the same manner as the US dollar since they trade at par.

The bond notes will not lead us into crisis because they are fully backed by the utilisation of the Africa Export-Import Bank facility.

Therefore, the value of the bond notes shall always be below the US$200 million facility. In this case, there is a self-checking mechanism.

This puts to rest the fears by some people that we will continue printing bond notes.

As a matter of fact, we will actually not print the notes in Zimbabwe, just as is the case with bond coins which we import.

The bond notes are fully backed by the US$200 million facility from Afreximbank, and are, therefore, fungible and fully convertible. The major point here, though, is not more about the bond, but about the 5 percent export incentive facility to be given to exporters, including tobacco and gold producers, in order to stimulate production and exports.

The bond notes, like bond coins, will be at par with the USD and would be banked in USD accounts just like what is happening with bond coins at present. The risk of injecting US$200 million directly into the economy is externalisation which is now a cause for concern to the Reserve Bank of Zimbabwe.

Policy measures to stabilise the economy are meant to strengthen the efficacy of the multi-currency system and to make it more sustainable and safer.

The policy measures are good for this country to enhance production and exports. The objective of the bond notes is to fund the 5 percent export incentive scheme in a sustainable manner that militates against capital flight.

This means without the bond notes, there would be no export incentive facility.

And without the export incentive scheme, there would be no bond notes. We cannot have one without the other. They are intertwined.

This, therefore, means there is a perfect self-checking mechanism under this scheme meant to enhance local production and exports that are, in turn, vital to sustain the multi-currency system and to stabilise and stimulate our beloved economy. The point is that Zimbabwe is now using a single currency as opposed to a multi-currency system, and as such, there is concentration risk of putting pressure on one currency, the USD.

That concentration risk needed to be diluted by going back to the basics of ensuring we have multiple currencies in circulation. The choice for the rand stems from the fact that 60 percent of Zimbabwe’s imports come from South Africa.

It is against this context that 40 percent of new exports in USD would be converted to rand and 10 percent in Euro.

We want to create a revolution for the use of plastic money in Zimbabwe to ensure we do not put too much unnecessary pressure on demand for cash.

This is why we have announced that all retailers, wholesalers, businesses, local authorities, utilities, schools, universities, colleges, service stations and the informal sector are required to install point of sale machines.

Use of plastic money also assists in the development and growth of an economy as this increases the multiplier effect of money.

Money tends to circulate much more with plastic money and wire transfers than in a cash economy.
Throughout the world, the best practice shows that not all deposits are covered by cash.

On an average scale, globally, 10 percent of deposits are cash while the rest is done through plastic money.

For example, in South Africa, the maximum withdrawal limit is R3 000 per day. In the United States, out of deposits of US$15 trillion, about US$1,5 trillion is traded in cash transactions.

There have been suggestions that we should adopt the rand as in the case of Namibia, Swaziland and Lesotho. This is a policy issue which is beyond the purview of the RBZ and can only be decided at a political level.

There are also several processes that will need to be followed. Therefore, the RBZ is not seized with such an issue at the moment.

We also understand that the public is worried about high bank charges and other cash withdrawal issues.

We have been engaging banks on the matter to ensure the banking public is not inconvenienced. It is against banking ethics to take advantage of the unsuspecting banking public.

We need good behaviour and integrity in the banking sector and those who fall out of line risk losing their licences.

In terms of leakages of foreign exchange from the country through externalisation, it is something that the RBZ is continuously addressing through monitoring of transfers.

Addressing capital flight is one of the major motivations for us to utilise the bond notes as opposed to injecting the US$200 million directly into the market.

That money would disappear into thin air!

Regarding externalisation of money from Zimbabwe, the RBZ is only a regulatory authority not a policing entity.

We require close co-operation with all arms of Government. We are saddened by such counterproductive activities that result in the abuse of our hard-earned foreign exchange.

Incidents of externalisation are worrisome throughout the world and need to be closely monitored.

It has been very difficult to objectively quantify the levels of externalisation as most of the money is externalised as cash by some unscrupulous businesspeople who sell their trinkets and other non-productive low local content items in Zimbabwe.

Wire transfers through similar transactions amounted to US$50 million for the first four months of 2016.

The payment of bonuses did not contribute to cash shortages. The major contributing effect is lack of circulation of USD cash.

This is emanating from the strength of the USD against other currencies, with the dollar now being seen as a commodity much more than a medium of exchange. The amount of cash required in the economy is US$500 million, being 10 percent of deposits.

We would also like to advise the public that the RBZ has imported more cash to the tune of US$15 million. This is money that has come in (on Friday).

This US$15 million will be put into circulation and will help ease the prevailing cash shortages

Dr John Mangudya is the Governor of the Reserve Bank of Zimbabwe. He was speaking with The Sunday Mail’s Chief Reporter Kuda Bwititi in Harare last week.

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