The impact of Zim's additional bond notes

The impact of Zim's additional bond notes
Published: 25 July 2017
The recent media reports that the Reserve Bank of Zimbabwe (RBZ) plans to inject more bond notes into the economy are unsurprising as no permanent solution to the country's cash crisis is yet found.

Despite the reported improvements in the cash and Nostro balances, the market is still grappling with biting effects of the cash crunch. This situation has been exacerbated by challenges in the functionality of electronic payment systems, therefore which is driving the high preference for cash and black-market activities.

These challenges occur barely eight months after the introduction of the surrogate currency, which indicates that bond notes are less potent to offer a permanent solution to the cash crush-increase production. This is unsurprising because of lack of independent monetary policy under dollarisation.

, therefore, eed for supply side interventions to re-industrialise the country. Regrettably, there is little traction towards achieving this economic imperative. The recently announced Annual Budget Review for 2016 and the 2017 Economic Outlook is revealing. As such the injection of additional bond notes in the economy will only provide a short-term reprieve to the cash crisis. This underscores the urgency of economic and structural reforms which are necessary to expand the country's production frontiers.

It is estimated there is currently a cash and Nostro funding gap of around $310million in the economy. With total deposits of $6.6 billion as at 31 March 2017, the country should maintain cash and Nostro balances of around $990million, being 15% of total bank deposits for smooth functionality.

However, this statistic stood at around $680million, being cash and Nostro balances of $450million, bond notes and coins of $160million and RBZ Nostro facility of $70million. Cash challenges continue to be experienced despite improvements in inflows from gold sales and the impact of reduced grain imports due to good harvest, reflecting the high preference for cash in the economy partly occasioned by challenges on electronic payment platforms.

Resultantly, cash and foreign payment queues have remained a major challenge in the banking system. Its reported that some banks are disbursing as low as $30 cash per week sometimes in bond coins whereas it is now a nightmare to make a foreign payment at some banks.

As highlighted earlier, the functionality of electronic money did not help the situation either. The electronic payment platforms are experiencing challenges due to increased system down time, errors, duplications and reversals. Unsurprisingly, the preference for cash has remained high much to the detriment of achieving a cash-lite society.

Clearly, these challenges are a big threat to the traction gained on electronic payments so far, which increased to $61.7 billion in 2016 from $56.9 billion the previous year.

We reiterate that RBZ should be more proactive to coordinate, encourage and even regulate banks to invest in infrastructure that support electronic money.

Needless to mention that issue of infrastructure sharing by mobile operators should be concluded as a matter of urgency if network connectivity is to be improved.

Importantly, the RBZ should learn from the experience in the telecoms industry and start to drive infrastructure sharing among banks.

The idea of mini POS machines should be implemented as a matter of urgency to ease transactions especially in the informal sector which dominates the country.

It's important to have an idea of the amount of bond notes to inject from the cash gap of $310 million.

Using a ratio of 40:60 in respect of Nostro funding to cash circulating locally,one can hazard an amount of $80million as additional bond notes required to liquify the local economy noting that there is still a some $40million unutilised space on the Afreximbank facility which supports bond notes. As such, there is an additional Nostro funding requirement of around $180million to ease the foreign payment backlogs.

Clearly raising this amount would be a toll order for RBZ, high levels of public debt.

This underscores the need for more participation by private players in respect of arranging Nostro funding facilities noting that they are already sourcing forex from the black market at prohibitive costs.

Whilst the need to inject more bond notes in the economy is beyond question, it's important to ensure that the RBZ continue injecting the surrogate currency in a measured manner- in sympatry with exports.

The growth in the economy (0.7 percent in 2016) coupled with increase in net foreign inflows ($229m in the first quarter vs $79m the previous year) supports a higher facility for bond notes.

Its beyond doubt that measures to industrialise the country are required to sustain the cash situation in the country.

This underscores the need improve the business and investment environment to attract and retain both local and foreign capital.

Needless to mention that all efforts to rebuild will be weighed down by corruption, which has remained unsolved. The high level of externalisation is telling. It is estimated that the country is losing an average of $150million per month on illicit financial flows, which is unsustainable.

Persistence Gwanyanya is the founder of Percycon Advisory. For feedback use: percygwa@gmail.com <mailto:percygwa@gmail.com> or Whatsapp on +263 773 030 691.
- zimpapers
Tags: Bondnotes,

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