Uptake of bond notes, cash crisis spike inflation

Source: Uptake of bond notes, cash crisis spike inflation – DailyNews Live

Gift Phiri      23 April 2017

HARARE – The increasing uptake of bond notes and worsening cash shortages
inducing premiums on products is pushing up inflation, leading think-tanks
have said.

This comes after consumer price index (CPI) inflation continued on its
upward trajectory last month after more than two years of deflation.

Zimbabwe recorded inflation of 0,21 percent year-on-year in March,
compared to inflation of 0,06 percent year-on-year in February.

This comes as US dollars have almost vanished from the open market as
banks refuse to dispense the currency to clients.

“We therefore expect consumers to increase the uptake of bond notes due to
there being few alternatives – in addition to pressure and incentives from
government,” Cape Town-based NKC African Economics analyst Chantelle
Matthee said.

“Although the Reserve Bank of Zimbabwe (RBZ) stated that no further bond
notes will be released anytime soon – which could avoid further
inflationary pressures through the printing of money – the government is
planning to broaden acceptable collateral to improve production and
exports in Zimbabwe,” she said, referring to a new law presented to the
National Assembly last week that allows rural poor to deposit cattle as
collateral for cash loans, with the Movable Property Security Interests
Bill  receiving wide cross-party support.

“However, it is difficult to determine where the cash funds for credit
will come from when the country is currently cash-strapped,” Matthee said.

“Regardless, Zimbabwe’s government has been floating the idea to use
movable assets as collateral since 2012 with no actual implementation to
date. We currently predict that inflation will average around the one
percent level this year.”

Low confidence in the banking system has led to consumers rapidly
withdrawing hard cash from banks. As a result, banks implemented a
withdrawal limit on consumers and businesses. So far the Reserve Bank of
Zimbabwe (RBZ) has pumped in $120 million worth of bond notes.

Financial research firm, Equity Axis said inflation will remain on a rise
for the greater part of 2017 and this will mainly be driven by cash
shortages, import substitution and a marginal increase in production.

“Cash shortages induce premiums on products depending on mode of payments,
the less cash equivalent the mode is, the higher the premium,” Equity Axis
said in a commentary.

The country currently uses a four-tier payment mode in the form of US
dollar, bond notes, mobile money and Point of Sale (Pos).

“The shortages of cash also negatively impacts on products supply, thereby
resulting in a market disequilibrium. To correct the disequilibrium,
prices will have to rise, in turn driving inflation upwards.”

Equity Axis said following the institution of Statutory Instrument (SI)64
legislation, the market became highly vulnerable to price distortions.