Bond notes, new RBZ monetary policy tool

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The decision by the Government through the Reserve Bank of Zimbabwe (RBZ) to unofficially begin the process of de-dollarisation through the introduction of bond notes has provided the Central Bank with a new monetary policy tool. Operating with no official discount rate or sovereign currency, monetary policy has largely been beyond the RBZ’s control since the US dollar was adopted as the country’s official currency.

Given the entrenched liquidity and cash shortages across the economy, the country’s monetary policy and price movements will be largely determined by the RBZ’s pace of injecting bond notes into the economy in a bid to increase the money supply and support Government’s fiscal revenues. Persistent cash shortages and fiscal pressures will force the Central Bank to continue injecting bond notes which will in turn have an impact on price movements. By April 2017, the RBZ has issued $120 million of bond notes which are circulating in the economy against the export incentive value of $130 million. However, cash shortages have not yet eased, highlighting limited impact of the currency to solve the cash situation. It is estimated that the country has a money supply shortfall which may reach as high as US$2 billion thereby limiting the chances of high inflation even under rapid expansion of bond notes issuance. This huge money supply gap increases the likelihood of the Government to extend the bond note supply beyond the current US$200 million cap. The central bank had provisionally limited the amount of bond notes issuance to US$200 million and there are already signs that this limit might be breached. For instance, these notes were initially introduced as an export incentive but were further expanded to remittances as well. The Government initially promised to have the notes printed by a third party to re-assure investors and the wider population that it was not returning to the days of hyperinflation, it is now unclear whether this is still the case. Furthermore, although currently underwritten by a US$200 million bond guarantee issued by the African Export-Import Bank (AFREXIM), there has been very little transparency on the terms under which it was issued.

Despite the political risks attached to any notable increase in prices, monetary and fiscal pressures will continue to pressure the Government and the RBZ to persist with the injection of bond notes into the economy. Fiscal pressures due depleting Government revenue sources will also play a role in influencing the pace and life of the bond note program. Persistent budget deficit may force the Government to look at bond notes for financing given the current public outcry over treasury bills. With elections fast approaching, fiscal pressures are further exacerbated as they imply increased Government spending. Generally, run away Government expenditures are the major source of current economic woes. These expenditures were being financed through treasury bill issuances which has seen Government domestic debt and the stock of treasury bills rising. This increased domestic borrowings by the Government as a result of limited external assistance is seriously undermining viability of the economy through crowding out of private sector. There are serious concerns in the market over the level of Government domestic debt and treasury bills stock. This has led to treasury bills facing huge discounts in the secondary market. Continued issuance of treasury bills may now be difficult which may force the Government to look at bond notes.

It is worth noting that the authorities have been cautious in issuing bond notes and are making concerted efforts to promote use of plastic money. However, questions still remain on the printing of bond notes as the once touted German printing company distance itself from the project and the quality of the notes. If the Government is indeed printing the notes, rather than any third party, there is little to stop them from simply printing more than the USD200 million value supposedly underwritten by AFREXIM Bank to narrow the huge shortfall in the money supply.

 

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