Bond notes fuel market distortions

THE introduction of bond notes has led to price distortions and rent-seeking activities as consumers continue to bear the brunt of economic implosion and ineffective interventions.

Source: Bond notes fuel market distortions – The Zimbabwe Independent February 10, 2017

Bernard Mpofu

Zimbabwe adopted the multi-currency system dominated by the greenback in 2009 after the Zimbabwe dollar was decimated by years of hyperinflation.

But an economic downturn triggered by declining business activity and export collapse has left government in a currency dilemma.

The Reserve Bank of Zimbabwe (RBZ) introduced bond notes in November last year ostensibly to incentivise exporters on the back of sagging exports. This triggered a culture of arbitrage and a parallel pricing structure as the United States dollar became elusive.

In addition, the introduction of bond notes has put local importers in a rut as some local banks reject the fiat currency to fund foreign payments as the economy continues to face severe foreign currency shortages.

A snap survey by the Zimbabwe Independent shows that some retailers are now having a parallel pricing structure for US dollars on one hand and bond notes as well as swipe on the other, resulting in widespread arbitrage and distortions.

At Mohammed Mussa Wholesalers, for instance, a case of sugar is bought at US$16 using US dollars, while those using bond notes or swipe machine require US$17,50 for the same commodity.

Official figures from the Consumer Council of Zimbabwe show that the monthly consumer basket leapt to US$600 last month from US$578 in December.

Some fuel stations such as Engen allow the use of point-of-sale machines at limited times mirroring the increased cash demand by businesses.

Cash barons are also in the market selling hard currencies at a premium to those making bank transfers.

Economic analysts said protectionist measures alone such as Statutory Instrument 64 of 2016 will not stimulate production in the capital-starved economy. Zimbabwe, they said, requires policy that attracts foreign capital arguing that bond notes had unnerved the markets.

“Certain businesses do not even accept card payments or bond notes, but only dollar bills. Furthermore, the introduction of bond notes spooked both domestic and foreign investors, which could potentially constrain future economic growth,” NKC African Economics said in its research note.

“The critical question is whether individuals and businesses will increase confidence in the bond notes — a development not expected anytime soon. As mentioned, consumers and businesses fear another bout of hyperinflation.

“If confidence in bond notes does not improve, the RBZ will sit in a tight spot as limits on daily cash withdrawals will be needed to maintain liquidity on the one hand, while the central bank will have to increase the daily cash withdrawal limit to ease deflationary pressures on the other. That said, we expect the government to force the acceptance of bond notes by law. Overall, our current outlook for Zimbabwe’s economic growth in 2017 remains bleak.”

Independent economist John Robertson told the Independent that the non-tradability of bond notes in making foreign payments would result in acute shortages of basic commodities.
“Many factories cannot start up again until they can import more new machinery. The difficulties of starting up former manufacturing companies are very severe.

Some have made some progress but very few have made progress that is making a difference. So I think 2017 is going to be a year of increased shortages of imported goods,” Robertson said.

Bond notes, according to RBZ governor John Mangudya, are backed by a US$200 million African Export and Import Bank (Afreximbank) facility and are largely an export incentive.
Official figures show that total exports stood at US$2,83 billion against a projected target of US$3 billion while imports were at US$5,21 billion resulting in an annual trade deficit of US$2,38 billion.

Mangudya could not be reached for comment. But the central bank contends that the fiat currency will stimulate exports, which will in turn generate foreign currency and spur productivity.