Exposing ignorance behind Bond Notes
The government has in the past weeks announced its plans to introduce bond notes to ease cash shortages and to prevent externalization. The bonds will be underwritten by a US$200 million loan from Cairo-based lender, the Africa Export-Import Bank. The governor of the Reserve Bank of Zimbabwe, Dr. John Mangudya, went on to assure the nation that the monetary authorities will only print bond notes equivalent to US$200 million and nothing more. The bond note will be at par value with the United States dollar.
The monetary authorities might not be misleading the nation on the fact that they will stick to their policy rules and will not print bonds in excess of $200 million because diverting from this promise will lead to loss of credibility from the general public. The major question is on the government’s worry on loss of credibility that I even doubt its existence on the first place. We wouldn’t want to deny that economic agents are still haunted by the memories of 2008 and hiding behind bond notes to introduce local currency would not help to clear these memories. It’s a fact the monetary authorities need to grab, economic agents don’t have confidence in them and ignoring that is a serious violation of microeconomic foundations on human behavior and rational expectations and it might lead to policy neutrality or invariance.
The monetary authorities might want to bank on the fact of imperfect information in the market and that not every economic agent knows every information in the economy but I would want to believe that economic agents are maximisers. The authorities cannot rely on this veil of ignorance this time and people can only be fooled in the short run, once and for all, if you continue, you can lose credibility as a policy maker.
Introduction of bond notes will help to solve liquidity crisis that is looming in the economy and we wouldn’t deny that it will reduce externalization but not of US dollar and Rand but maybe of the bond itself. Zimbabwe is importing heavily from the neighbouring countries, our production capacity is very low and we are importing even baby diapers and lemons. This means that economic agents are not going to stop demanding foreign currency to purchase goods from outside. This is a clear fact that we are not going to stop externalization of United States dollar, South African Rand etc, which means that this liquidity crisis is going to persist and in the long run monetary authorities are going to be forced to print more bond notes to easy out the cash shortage.
The bond note will flood the market and economic agents will demand more bond notes to purchase more Rand notes and US dollar on the market in order to import and the speculators are eagerly waiting for this time.This means that the bond will depreciate in value against US and Rand, prices of goods and services will start rising and this minor trigger is far enough to take us back to the hyperinflationary environment of 2008. Given the multicurrency regime assumed by the monetary authorities on board, we might be fooled to assume that those with excess income would be willing to hold it in the form of bond note. Everyone will struggle to off load the bond and purchase the much secure US dollar. This alone will push down the value of the bond note against other currencies.This is the major fear of economic agents and the failure of monetary authorities to take this on board will worsen the situation.
It’s quite obvious that the mere announcement of the policy has caused much harm already than what the implementation of the policy itself is going to do. Rational economic agents now prefer to hold their excess wealth in the form of a highly liquid asset, cash, rather than in the form of demand deposits or in the form of other less liquid assets. This have worsened the situation as no one is now willing to deposit money in bank accounts, others are now transferring their wealth to offshore accounts to avoid future losses. This alone should tell us where this whole thing of bond notes is going. Shortages of major basic commodities like sugar, cooking oil etc have already started and there had been a minor increase in the prices of these commodities. Local producers of these commodities have already reduced their production scale either because of failure to access other important raw materials due to cash crisis or as a way of trying to avoid future losses.
I strongly feel that the introduction of bond notes is not even a short run solution to the current liquidity crisis. The government is not addressing the cause of money flight with this introduction of bond notes because even with bond notes, we still have to import goods from other countries and the government’s plan to continue importing more foreign currency isn’t even a measure that can be sustained even in the short run.
The export incentive scheme is doomed to fail again and wouldn’t attract the much needed foreign currency to sustain the economy. We wouldn’t afford to export what we don’t have. We are failing even to produce baby diapers for our economy then what are we going to produce for exportation? We are currently incapacitated to produce due to the dilapidated infrastructure, inefficient utilities, obsolete equipment and outdated technology. Slumping commodity prices is also another factor that is going to hinder exports promotion which means we should try exporting finished or semi-finished products. No matter how we might want to ignore this fact, but we are going to keep on bumping on it again-Production! Boosting production is the only key solution to all the problems that our economy is currently facing. We shouldn’t also deny the fact that on our own we couldn’t raise the much needed capital to boost the economy. Much should be done to attract the much needed and long awaited Foreign Direct Investment. Policies that are not investor friendly should be scrapped out and we want serious investors not bogus foreign entrepreneurs who are geared on personal gain at the expense of the whole economy.
Boosting production will create the much needed two million jobs promised, will increase the supply of goods in the local market, will reduce amount of imports hence money flight, increase amount of exports hence increase the inflow of the much needed foreign currency, reduce the Balance of Payments deficit, will enable us to use our own local currency and above all will also help to generate tax revenue for the government and enable it to improve on public utilities and improve the standards of living for many. We wouldn’t want to deny that this is a long term objective but I would support taking a longer course that have a bright future ahead than wasting a lot of our precious time on short run policies that have proven their failures even before implementation. Lets not suppress the results of a problem but lets craft policies aimed on addressing the cause of the problem.
Promoting the use of plastic money is a better option in the short and in the long run but in Zimbabwe where unemployment rates are currently above 89% and the majority of the population is under informal sector, issues of financial inclusion should not be ignored.
Blessing Machiva is an Economist and writes in his own personal capacity. Criticisms, comments and additions can be forwarded to the following e-mail address firstname.lastname@example.org or WhatsApp number +263773 836 435