Bond Notes - The Debate Goes On

(Article published in the Sunday Mail of 15 May 2016)

The bond notes debate of went into overdrive the past week, culminating into a ZNCC breakfast meeting that later got massively oversubscribed and eventually turned into a half-day session. The session was indeed an honest engagement between policy makers and business. Among other important aspects, the RBZ made a fundamental clarification in that the bond notes are primarily an import incentive and never a cash shortage antidote. That clarification was important in the first place and as the RBZ public relations skills go into overdrive, it becomes important that the clarification becomes more clearer, more so to their fellows in government who have not yet gotten it to now. Why is this clarification important?

Rebutting a cash shortage with issuance of bond notes implies, to some extent, that the supply of bond notes would be dictated by cash withdrawals from the banking sector and that would mean that the market would be awash with bond notes in a very short space of time. With government wage bill estimated around $230 million per month, that would imply that one month payroll would wipe out the 200 million bond notes if one considers the massive cash withdrawals that usually come with civil servants pay-dates, more so when there is a general uneasiness with regards bond notes in the market. The fears therefore that the market would be awash with bond notes in a very short space of time would be genuine from that perspective.

And it becomes important that the clarification concerning bond notes being an export incentive be well communicated and understood. When bond notes are being issued as an export incentive, and of course with the RBZ sticking to its promise to issue them as such, the story then becomes a totally different ball game. Total exports, which peaked in 2012 at $3,9 billion, have been coming off year on year since then to $2.7 billion in 2015 and that is bad for this economy and the incentive could have come at the right time. Considering that exports are generally spread across the whole year, the injection of bond notes, as long as they remain an export incentive, will be equally spread. Making the assumption that the exports will stagnate around the same levels as last year, the next one year will see an injection of about $135 million worth of bond notes into the economy, with the injection being spread over a year in line with export receipts. The question that becomes important then is responding to fears that the $135 million worth of bond notes will destabilize the pricing structure in the market, in particular the goods market pricing (inflation) and currency prices via the exchange rate route. For Zimbabwe that has GDP of $12 billion and monetary aggregates around $5 billion, the $135 million injected over a period of 1 year is surely not at all an amount to worry about it causing pricing distortions, more so considering that it would be incentivizing production and replenishment of the nostro accounts.

Dollarisation has had the negative impact of dis-incentivizing exports of largely manufactured goods for obvious reasons that the incentive to generate foreign currency would be zero, more so at a time capacity utilization in industry is so low that all output can be easily absorbed in the domestic market. The incentive should therefore be a non-inflationary stimulus package to incentivize exports. Although itself a good idea to incentive exports across the board, the RBZ may need, in future, to carefully re-categorise exporters and reward more those that are taking extra efforts to export. Mineral exports should not be incentivized at the same rate as exports of manufactured goods on account for the obvious reason that the latter are going an extra mile to export products that may equally be sold in Zimbabwe without all the hassles associated with exports.  On the same note of incentives, the issues relating to policy equity come to the fore, especially for manufacturers that are in key import substitution sectors who would correctly argue that by substituting imports, they are equally as important as those exporting and should therefore get rebates in one form or another to remain competitive, failure of which their exit from the market can easily be filled by imports, thereby worsening the balance of payment position.

Whatever various arguments will come up, output incentives are very key in a country desperately in need of jobs and growth. The fact that the USD environment brings about economic stability is not debatable, but it is very important to equally understand that its ability to deliver jobs and growth at sustainable levels is very limited. Upon dollarization in 2009, policy fixation was on stabilization considering the ravaging impact of hyperinflation and the thinking was not wrong. Hyperinflation was traumatic and Zimbabweans needed a break, a well-deserved one for that matter. And indeed for 7 years, we have stabilized but unfortunately, that stability has not been able to deliver growth to impact positively on job retention and creation and that, unfortunately, is a disaster.

A lot many big companies have gone burst during the dollarization, whilst quite a number of those that are still standing are limping towards their death. In any case the major challenge of the current deflationary environment relates to real debts that continue rising, trapping corporate balance sheets in septic and corrosive pools of unsustainable debt. The worst bit is that Zimbabwe is in a deflationary environment yet interest rates have remained very high, more so for borrowers in default who attract penalty rates above 20% per annum. When that is juxtaposed to the falling revenues and operating costs that are so stubbornly high, industry is in big trouble. The carnage that has happened on the ZSE since dollarization bear testimony to this. It is no surprise therefore that even the Zimbabwe Revenue Authority is battling to recover tax debt which has ballooned by 31% to $2.5 billion for Q1 2016 from the December 2015 levels. This increase of 31% in just three months is frightening, itself a clear sign that indeed the economy is in serious trouble. Equally, the fact that tax collections have been coming down at a time Zimra is intensifying tax collection efforts paint a picture that shows that there is a serious competitiveness challenge underlying the economy. Tax revenue dipped 10% in Q1 2016. There is no doubt therefore that the economy needs policy interventions to ease the market and not just incentivize exports.

And its not only the broad macro-economic indicators that are pointing southwards. The worsening fundamentals have impacted on societal moral balance. Annual murder rates have increased more than 100% from 638 cases in the year 2010 to 1,387  in 2015. As would be expected, fraud cases have more than quadrupled from 2,624 cases in 2010 to 11,207 cases in 2015 according to Zimstats. These are indicators of serious challenges that, to some large extent, reflect the challenging economic environment that is very stable, yet so difficult. Household debt as a percentage of disposable income is now hovering around 63% and indeed it explains why emotions leading to higher rates of murder are running high, whilst the absence of jobs in the market could surely be pushing testosterone levels beyond the normal. And that probably explains why rape cases have increased by over 80% since 2010 to 7,752 rape cases recorded last year. What a pity! 

Dollarisation has created a very tough environment where, without proper work, generating income for the ordinary person is becoming very difficult by the day, the very reason why policy makers should focus on creating jobs to cushion the majority of the unemployed. Therefore the argument for quantitative easing in the economy should never be taken lightly. Statistics don’t lie, and more importantly, rarely mislead. However when they seem to do, it is usually on account of misinterpretation or abuse. Zimbabwe, with domestic financing as a percentage of GDP around 31%, is stuck in a quagmire and at that level, remains one of the lowest in the world for countries that are not over-reliant on natural resources for growth. It is clear therefore that Zimbabwe needs around $4 billion to $5 billion of new fresh funding to allow the banking sector to allocate credit and push domestic financing as a percentage of our GDP to around desirable levels of 80%, which levels will allow the economy to engage in massive infrastructure projects, create jobs and set the foundation for industrialization. There is never a country that has industrialised without a solid base of infrastructure and Zimbabwe has limited ability to cheat this statistic. How surely will this ever be achieved in a dollarized environment?

It is therefore becoming increasing clear that the economy needs creative but non-inflationary ways to stimulate growth, create jobs and bolster incomes. And the bond notes, as long as they remain import incentives for now, may provide part of the relief. Zimbabwe has a good history under its belt of rejecting currencies that are not stable or the worthless (mazuda). The rejection of the Zimdollar then and that of the South African Rand recently should be sufficient comfort for the market that indeed the use of currency in the economy is dictated more by the people and never by the policy makers. Luckily, the RBZ seems to be aware of it, the reason it has gone out in full force to engage the market and giving assurances that the bond notes issuance are a genuine export incentive, knowing fully well their excessive printing will, without doubt, make them suffer the same fate as that of the Rand and Zimdollar.

Bond Notes in Zimbabwe - A Technical Perspective

(Article published in the Sunday Mail of the 8th of May 2016)

The beginning of winter usually heralds innovation and reincarnation, and worse for trees, they shed leaves to adapt to harsh conditions. This winter the ongoing cash crunch, which has been fermenting for some time, emerged much stronger, eliciting responses from the monetary policy authorities. The crunch has been rebutted with the additional liquidity injection in the form of bond notes, in effect the visible and clearest indication of an increase in the local currency in circulation. To date, the visible local currency has largely been the bond coins.

Yes, It’s Currency!

As expected, there is ongoing debate on whether the bond notes constitute full scale issuance of local currency. It however requires little elaboration that whenever a medium of exchange is issued by a monetary authority, more so with the same authority having the ability to benefit from seignorage revenue, that constitutes currency. It therefore explains, without doubt, that the bond notes, irrespective of the name given to them, are a legal tender issued legitimately by monetary authorities and as such are a legitimate local currency. The expectation by the same issuing authority that the bond notes will be accepted and shall be used in the market as legal tender, unit of account and store of value rebuts any thinking to the contrary. It remains true however that the bond notes, for their name, are not Zim dollars as the latter carries unpleasant memories that can easily traumatize the markets and destroy confidence that has been built over the years by the adoption of the multiple currency system. Therefore no one should fault the policy makers for purposefully avoiding using the term “Zim-dollar”, for its memories alone are strong enough to traumatize an otherwise healthy someone and get them admitted in hospital.

Why now?

Exactly 7 years after the introduction of the multiple currency environment, the introduction of the bond notes has reincarnated fierce debate on whether the timing is right. Not so long ago, thus on 22 December 2015, the Monetary Authorities, for the umpteenth time, distanced themselves from the reintroduction of local currency.  The rational has always been clear, and so appropriately valid. By confirming the possibility of reintroduction of the local currency, the authorities have been wary not to bring back the dark memories, knock confidence out of the market, instigate bank runs and in no time, create serious liquidity gridlocks and reverse the gains made over the years. Yes, it was within their right minds to rebut any such unwarranted speculation especially after an expensive and unnecessary exercise to demonetize the Zim dollar had been conducted between 15 June and 30 September 2015.  That process legally extinguished the Zim dollar out of existence.

On the same thinking, the Minister of Finance, Hon Chinamasa had issued a statement in July 2014 in full support of the multiple currency regime after rumors of reintroduction of local currency surfaced. Unfortunately, and very much so, he strongly rebutted the possibility of reintroducing local currency and spelt some pre-conditions that would need to be met before considering the same. He cited restoration of industry competitiveness, sustainable current account position, sustainable economic growth and restoration of confidence in the banking system, among others. Two years down the line after his statement, nothing has improved on these parameters. In fact, all of them have become worse and yet, in the face of such, the wisdom to reintroduce local currency in the name of bond notes has prevailed. Economic growth prospects have worsened since 2014, from 3.8% then to current forecasts of negative 1.2% in 2016. The current account position is no better, whilst the banking sector, much stronger in 2014, has now been buffeted by winds of cash challenges last seen during the dark ages of hyperinflation.  What it is that could have changed between then and now to convince the same authorities to think otherwise remains a mystery, save to say that this has been surely a very difficult decision for the same policy makers who had stood firm in their beliefs.  

Why cash crunch now after 7 years?

The question that begs the answer and continues to, in some extent, remain unanswered relates to how and why the cash crunch has surfaced now, 7 years after dollarization. Why did it not start in the formative days when money was literally scarce? A few rational explanations provide some, but of course not all of the reasons. Monetary aggregates have ballooned over years, from as little as $475 million in total banking deposits during dollarization 7 years ago, to around 5.6 billion in December 2015. This monetary expansion, itself a sign of increasing confidence and growing economic activities compared to the preceding hyperinflation era, ballooned much faster on account of break-neck lending that saw loan- to-deposit ratios skyrocketing and peaking at 85% in December 2011. Considering the absence of the reserve ratio in the market and the cocaine-like induced high rates of interest that have long obtained in the market since 2009, there is little reason to doubt that the excessive monetary expansion, for a country without formal arrangement on dollarization with the US Fed, would one way or the other, run into some challenges regarding funding cash imports.

In simple terms, money has, since 2009 to date, been manufactured quite fast at the signing of loan agreements in the domestic banking sector. Considering the persistent yawning deficits on the current account, it subsequently became difficult to replenish the nostros at fast enough rates in order to meet the resultant growing demand for cash imports especially after the banks’ retention levels were whittled down.

On the other hand, the bilateral lines of credit, although a much desired source of financing big projects in the 

absence of better alternatives, have equally exerted pressure on liquidity outflows.  The bilateral ‘buyers credit’ lines of credit from China and India, among others, have a significant short-to-medium term negative impact on liquidity. For example, accessing a $200 million bilateral line of credit under an engineering and procurement contract would see equipment and services worth $200 million being shipped to Zimbabwe. However even well before the project is complete, which projects take years in many such cases, the country would already be paying both interest and principal towards servicing the facility to the overseas originator of the facility. And that is serious liquidity going out of the country that would need strong compensation from exports on the current account, without which the country experiences serous nostro funding challenges. Unfortunately our current account has been in tatters since time immemorial and running around $3 billion deficit a year since 2011, its financing has largely been from debt creating inflows from the capital account that unfortunately doesn’t assist in liquidity management in the long run.

The central government, on the other hand, which that has been finding it very difficult to institute expenditure-related reforms to enable it to live within its means in the face of declining fiscal revenue, has equally exerted funding pressure in the market. These factors, among many others, have exerted significant pressure on the ability of the banking system to fund cash requirements.

Lessons from the past

The lessons from the bond coins should be the learning yardsticks for policy makers. At their introduction in December 2014, there was a lot of skepticism and resistance that saw a significant quarter of society rejecting and deriding them. Eventually they became acceptable and today they are preferred ahead of the South African Rand. What lessons can be drawn from this? The most important aspect is that the bond coins were not being forced on anyone, neither were there outright threats against anyone rejecting them. The acceptability came out of confidence in that indeed the policy makers had genuine concern to resolve the issue of change that was affecting pricing of good and services. And more importantly, the stock of bond coins remained more or less static and considering the exorbitant costs of printing coins, new supply was put at check and that stabilized the perceived exchange rate and to this day, bond coins are still acceptable at par to the US$. Gaining market confidence is very important and monetary policy history in this country has clear tombstones depicting how excessive control measures never worked and got buried with time. The foreign exchange controls, the cash withdrawal limits, import restrictions and a plethora of other control measures instituted during the 2000-2008 era never worked and eventually led to the abandonment of the Zim dollar in 2009. The tombstones are clear and indeed the cremation of the Zim dollar during demonetization on 30 September 2015 bear testimony to this.

Confidence is earned

Inasmuch as there may be challenges in the current environment, the policy makers need to exercise restraint in the issuance of the new notes to allow the currency to find traction in a market that is full of negativity. Equally important is for the policy makers to avoid exhibiting panic modes by coming up with a plethora of controls, restrictions and prescriptions especially at a time they are attempting to gain market confidence. Confidence is like a currency. It is earned and requires prudence and hard work to earn it, more so in a market as ours where previously the now defunct Zim dollar destroyed every known measure of confidence.

Prescribing the type and form of currency that people should hold and use in a multiple-currency environment may defeat the whole flexibility that is assumed to come with multiple currency regime. The bond notes, if issued with prudence and restraint, should be allowed to compete for space and relevance like any other form of currency currently in use and that way they gain credibility and open acceptance. As long as its issuance is going to be well managed, it will eventually find traction and widespread preference against some of the other currencies in the basket. The same goes for the South African Rand. The Rand has been depreciating over the last year on account of domestic challenges in South Africa relating to its poor management of domestic finances and global commodity slumps. And indeed everyone has been alive to the drama surrounding the hasty hiring and firing of Finance Ministers by President Zuma. Therefore efforts to prescribe Zimbabweans to hold the Rand against their wishes may be inappropriate and the policy makers should strongly consider the negative consequences and just abandon it. 

Yes, South Africa is our biggest trading partner and using the Rand may help in resolving the cash crisis but surely attempting to impose the use of the Rand in the market may not work. It is an experiment not worth taking. South Africans, more than Zimbabweans, should work hard they currency be acceptable beyond their borders. The policy makers need a serious rethink on this and any other such prescriptions and controls being proposed that end up creating more problems than we intend to solve especially at a time we are introducing our own bond notes. Controls are a road so familiar to us. We have walked down this road quite often and it takes us to the same destination and it is high time we introspect and consider more market friendly options. The reintroduction of local currency was never going to be easy in this generation, and the policy makers are very alive to it.  Equally, the continued use of the US$ was never going to deliver prosperity, but just stability. And that is fact. Now that our currency is here, the policy makers, more than the market, should strive to employ all known tactics to build confidence around the new notes and prove that indeed this current generation has capacity to learn from its mistakes and correct them. With odds at 5000-1, Leicester City won the English league.