The Reserve Bank of Zimbabwe (RBZ) says it has raised over $1 billion through the issuance of savings bonds to mop up excess liquidity from the market and fund Government expenditure.

Last September, the central bank issued the bonds to individual and institutional investors.

The debt securities, which had a seven percent annual return, were meant to raise money to fund Government business.

In an interview this week, RBZ governor Dr John Mangudya told the Business Weekly, that demand for the paper was high.

“Uptake of the savings bond has been very positive. We are now up to over $1 billion in savings bonds.

“We are using it to sterilize the market and for absorbing excess liquidity, so it’s very important for us,” he said.

The minimum purchase will be for $100. The maturity periods for the bonds vary from one year to five years.

Listed entity Delta Corporation Ltd is one of the local companies that has been attracted to the savings bond with chief executive officer Pearson Gowero telling analysts earlier this year that the company had invested approximately $45 million into the RBZ issued savings bonds.

Gowero said the investment was made to “to support on lending to exporting businesses.”

Empowering banking public

The savings bond was initially announced in last August’s Monetary Policy Statement in which Dr Mangudya out across the paper as a catalyst in empowering the banking public.

“To encourage individuals, families, households, small and medium enterprises, schools, universities, public and private institutions, corporates, churches and investors in general, to start saving and to nurture a culture of saving and building national wealth the Bank has developed a savings bond which offers simplicity and guaranteed returns with minimum investment from as little as $100 with no commission, agency or service fees,” he said at the time.

“The savings bonds will help to accelerate the empowerment of the banking public by providing an investment instrument with high-yielding returns as well as offering safe and secure investment.

“The savings bonds will be made available, through banks, selected agencies and electronically on a platform to be established. The bonds will be accepted as collateral on all borrowings and convertible to cash on a simple open and transparent fixed conversion rate on any trading day.”

Mopping excess liquidity

But as the governor has clearly indicated the bonds are also playing another critical role as they are being used to counter the effects of increased money supply.

Economist Brains Muchemwa said excess liquidity has numerous negative consequences on an economy.

“They are too many to specify, more than a hundred. They range from poverty, inflation, income, yields, broad monetary expansion, real earnings, market risk, credit risk, just to mention a few.”

Financial experts also argue that to the extent that banks hold liquidity in excess of requirements, any attempts by monetary authorities to increase liquidity to try and stimulate aggregate demand will prove largely ineffective.

It is also assumed that in the presence of

excess bank liquidity, it becomes difficult to for the central bank to regulate money supply through the required reserve ratio and the money multiplier.

So to the extent that the saving bonds are effective in reducing excess liquidity, it will help strengthen the RBZ’s monetary policy transmission mechanism.

Some observers however see limitations in the extent to which the paper can mop up excess liquidity.

According to an earlier survey by Investments Professionals Association of Zimbabwe (IPAZ), an association of chartered financial analysts, most of its members were of a pessimistic view.

“On the effectiveness of the RBZ bonds in mopping liquidity on real time gross settlement (RTGS), 66, 67 percent said there is no short to medium term impact on liquidity because the liquidity problem is systemic and the RBZ cannot address liquidity but can only manipulate its extent,” said IPAZ.