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.