THE elimination of bond notes, which has been called for by many, will not solve Zimbabwe’s fundamental economic problems, economists have argued.
The country has suffered chronic economic distress for more than two decades, of which, lately, a currency crisis has been the face, they say.
This has created a villain of bond notes, which were introduced in 2016, with many blaming much of the country’s current hardships on the surrogate currency said to be backed by an African Export-Import Bank facility.
On this backdrop, the new government has indicated that it intends to make some monetary changes, starting with the elimination of bond notes.
Economists have however warned that any reform programme that is not focused on fundamentals, with particular focus on the fiscal policy, will not come to anything.
“Even if bond notes were eliminated today, that would not solve the fundamental problems, we even had these before the introduction of the notes…we are blaming the symptoms when we should be dealing with the disease. Let us deal with the fundamentals,” Christopher Mugaga, an economist and chief executive of the Zimbabwe National Chamber of Commerce, told The Financial Gazette this week.
Gift Mugano, another economist, said bond notes have contributed to a loss of confidence on the system but added that the country’s problems go beyond confidence issues.
“Removing bond notes might correct the confidence issues that were created by their introduction, but our problems run much deeper. We need fiscal consolidation and support with cash deposits to bring up our reserves,” he said.
Mugaga said government should not be preoccupied with bond notes, but should focus on the fundamentals, “starting with fiscal consolidation”.
In 2017, government’s domestic debt rose by 70,45 percent to $6,27 billion, while credit to the private sector stood at $3,71 billion. The increase in credit to government reflects its increased reliance on the banking sector to finance its budget deficit. This has pushed an increase in money supply, particularly real time gross settlement (RTGS) money.
“Under dollarisation, financing of the deficit should ideally be from foreign sources in order to mitigate the domestic creation of money which is not matched by foreign exchange,” John Mangudya, the central bank governor, said in his monetary policy statement in February this year.
Between June 2017 and June 2018, money supply increased by 41 percent, from $ 6,49 billion to $9,14 billion. This reflected an increase of in RTGS balances of 93,31 percent.
“…money creation in the form of RTGS balances has been very significant, broad money has continuously increased as government has been issuing Treasury Bills to pay for its debts locally…when they give that paper to an entity it becomes a balance on that entity’s account but there is no cash to back that up so there is a lot of virtual money in the system,” Mugano said.
Persistence Gwanyanya, another economist, said the virtual money is a worse evil than whatever people believe bond notes to be.
“What should be clear in your mind is that bond notes, though not perfect, are better than RTGS money. A look at the premiums on these two forms of money reveals this,” Gwanyanya said.
Mugaga said the virtual money is more of a problem than bond notes, “but the real problem is what has created these things — government borrowing”.
“Legislation should be adjusted to remove the central bank’s overdraft facility to government,” Mugaga asserted.
He also recommended a liberalisation of the foreign exchange market saying Foreign Currency Accounts or FCAs should be reinforced, adding that the central bank should scrap its foreign currency allocation priority list in favour of an “open market”.
Gwanyanya echoed Mugaga’s sentiments.
“There is need to improve bond notes by abandoning its exchange rate peg to the US dollar,” Gwanyanya said.
Mthuli Ncube, the newly appointed finance minister, has been very vocal lately, expressing his views on what should be done to turn around the economy.
Fiscal consolidation, monetary reforms, and currency market liberalisation are all ideas that he has backed.
Most Zimbabweans have however remained cautiously optimistic, after years of too much talk which is not complemented with action.
Despite promising fiscal rationalisation earlier this year, government recently gave civil servants an increment, even after public warnings against such “imprudence” from many including Patrick Chinamasa, who was then finance minister.
Fingaz