Gift Phiri 16 April 2017
HARARE – If visibility and predictability are two foundations upon which
stable financial markets are built, comments from the Reserve Bank of
Zimbabwe (RBZ) last week on the adoption of bond notes as a primary
currency to alleviate cash shortages suggest Zimbabweans should brace for
increased currency volatility.
While the RBZ has said bond notes are not Zimbabwe dollars for they are
not a currency but financial instruments, ostensibly issued at par with
the US dollar, there are renewed worries that the central bank plans to
circulate more bond notes to ease dollar shortages in a move that could
open the door to rampant printing of cash as happened in 2008 when
inflation hit 500 billion percent, wiping out savings and pensions.
RBZ director Economic Research Simon Nyarota waded into the debate over
the bond notes and the need to buttress the multi-currency regime with the
surrogate currency, drawing rebuffs from economists and casting doubt over
the continuity of the current multi-currency foreign exchange policy.
On the one hand, this should come as little surprise. A key pillar of the
RBZ’s campaign was to address the chronic cash shortages and supplement
the dwindling US dollars that have been in circulation for the past eight
years that were being externalised.
The RBZ Economic Research director told a public lecture at the National
University of Science and Technology in Bulawayo last week that bond notes
must be adopted as legal tender, instead of the rand
“The country needs to buttress the multi-currency regime with bond notes
towards a full currency board arrangement as part of a de-dollarisation
agenda,” he said.
“To migrate to a full currency board, the country needs to cover 100
percent of base money which currently stands at around $1,1 billion with
foreign currency reserves.”
Zimbabwe started circulating a $5 bond note in February, as President
Robert Mugabe’s government struggles with a deepening liquidity squeeze
that has forced people to spend hours at banks queuing for money.
The RBZ first introduced a $2 note and $1 coin last November to ease the
A bond note unit – limited for domestic commerce – has been fixed by the
RBZ to trade at par with one US dollar. But retailers have low confidence
in the surrogate currency and place different price tags on goods
dependent on the currency used to pay for the item.
Firms’ prices reflect that one US dollar in hard cash is equivalent to
$1,30 in bond notes, meaning that the surrogate currency has already lost
30 percent of its value. Zimbabwean firms resorting to the black market to
get US dollars pay a premium of up to 25 percent.
For policymakers, the verbal volleys from economists sharpen the focus on
the central bank’s commitment to address “the prevailing harsh trading
But for investors and economists, increased volatility looks on the cards.
MDC shadow Finance minister Tapiwa Mashakada said partial de-dollarisation
was attempted in Latin America by countries that had, like Zimbabwe,
Zimbabwe abandoned its own hyperinflation-hit currency in 2009 in favour
of the US dollar, but a widening trade deficit, lack of foreign investment
and a decline in remittances by Zimbabweans abroad have helped to fuel
foreign currency shortages.
“Examples are Bolivia, Costa Rica, Ecuador and Chile. The moment they
started partial de-dolarisation, imports fell and this was followed by
price distortions and capital flight,” Mashakada warned.
“In our case, partial de-dolarisation will lead to unintended consequences
such as shortages of basic commodities and hyperinflation.”
Economist Kipson Gundani said tinkering with money won’t resolve the
fundamental challenges in the economy.
“Until we address the cash shortages through increased production,
increased exports and significant cut on imports, the cash situation will
continue to deteriorate,” he told the Daily News on Sunday.
“In my view, bond notes are contributing to the confusion in the market.
This country is a net importer at the moment, and because bond notes are
not functional beyond the borders of Zimbabwe that has led to serious
internal market misbehaviour of ratings cash hoarding, price distortions
“There is absolutely no merit on why we have not made the rand our primary
currency, despite research and economic indicators suggesting that.
“We are in a crisis that has no visible ending.”
In a ministerial statement on cash shortages to the National Assembly last
week, Finance minister Patrick Chinamasa said non-banking of cash by
traders was the major cause of cash shortages and queues for cash at
“This indiscipline is counterproductive and cannot continue to be
tolerated,” he said.
“Money is like blood, it needs to circulate for the economy to survive.
Money should be circulating in order to deal with queues at banks.
“To date, three traders have been hauled before the courts for not banking
their sales proceeds in line with the laws of the country from as far back
as June 2016. They have all pleaded guilty to the offence and they now
await their sentences after the Easter Holidays.”
Chinamasa also said government funds its employees’ salary accounts
through electronic transfers over the Real Time Gross Settlement (RTGS)
platform – a system for large-value interbank funds transfers.
“On the contrary, employees would want to obtain physical cash from banks.
This misalignment is the greatest cause of queues at banks for cash as
both the Reserve Bank and banks would be required to withdraw foreign
exchange from their Nostro accounts (used to facilitate settlement of
foreign exchange and trade transactions) to meet local cash demand,” he
The RBZ said on Friday it has been guided by the realities of the
prevailing harsh trading patterns to impose new cash-back limits to curb
“Any cash-back facility made available by retailers and wholesalers shall
not exceed an amount of $20,00,” the RBZ said in a statement.
“The Reserve Bank shall collaborate with wholesalers, retailers and their
associations to ensure the adequate provision of Point of Sale (POS)
machines in order to enhance the use of plastic money for transactions.”
The Reserve Bank is advocating for the use of plastic money in order to
ameliorate the mismatch or gap between electronic salary transfers and the
demand for cash from banks.
“Embracing plastic money preserves foreign exchange in the Nostro Accounts
for use for foreign payments whilst at the same time mitigating against
non-banking of cash by traders,” Chinamasa said.
Government is also considering removing the 5c tax on plastic money in
order to reduce the cost of transacting.
Retailers and dealers fuelling the three-tier pricing that has emerged as
market forces are overpowering the forced parity of bond notes face
imprisonment of up to seven years. RBZ deputy governor Kupukile Mlambo has
said he was aware that some of the retailers have a three-tier pricing
system; for bond notes, swiping and US dollar, “that is illegal; the law
doesn’t allow it.”
This comes after President Robert Mugabe last month signed into law the
Reserve Bank of Zimbabwe Amendment Act, 2017 (No. 1 of 2017) which
outlines that those who devalue or deface bond notes are liable “to
imprisonment for a period not exceeding seven years.”
The non-banking of cash by traders that authorities claim has spawned cash
shortages is currently being attended to by the Reserve Bank and the
police under the Bank Use Promotion Act (Chapter 24:24) which compels
traders to bank their surplus cash on a daily basis when banks are open
Mugabe unwittingly confirmed during his annual birthday interview with the
ZBC in February that even he kept money at home fearing bank failures.
“They (ordinary Zimbabweans) carry those earnings into their pillows and
briefcases back home and hold funds back home and become reluctant to
release them. Then the banks will not have any resource and will continue
to talk of illiquid banks in the system.
“That is what has happened. Dzimba idzi dzizere nemari (Many homes are
full of cash). Tikati kumapurisa nemasoja (If we instruct the police and
soldiers to) go house by house and dig for the funds that are being hidden
there . . . You will be guilty and I will be guilty.
“I don’t know who will not be guilty here … Dzimwe nguva ukaona tumari
twako wotya kuti aah ndikanoisa uko kuti ndizonoitora mangwana hapana (If
you have savings you will be afraid of depositing them in the bank because
tomorrow you may not get that money).
“So you tend to keep it. It’s not your fault . . . It’s the fault of a
system that has not yielded enough cash. Mind you, the (American) dollar
is not our currency,” Mugabe said.
Zimbabwe National Chamber of Commerce chief executive Chris Mugaga said
cash hoarding was done by people who are “lazy.”
He said de-dollarisation proposals by the central bank exposed “lack of
policy credibility at the RBZ.”
“What message are they sending?” he asked rhetorically, adding the fiat
currency was issued as an incentive to exporters of goods and services.
“Credibility of policy is everything in economics. The RBZ must wait for
business to say it. They are not well positioned to say we must
de-dolarise, it becomes a contentious issue.”
He said bond notes derive their value from the $200 million Afrexim Bank
facility, which caps the amount of bond notes to be issued at the facility
“De-dollarisation musty not be imposed by the RBZ, it must be a gradual
process. The market has lost confidence in the local unit.
“It takes long time to de-dollarise, 20-25years, it takes time to rebuild
confidence in a local unit after it has been decommissioned,” he said,
highlight public’s fear, anxiety and scepticism surrounding bond notes
which have dented trust and confidence within the economy
He said the RBZ must be addressed the structural issues, the fundamentals
to support the currency, address the trade and fiscal deficit.