
RBZ injects more bond notes into the system as catch-22 prevails
By Guest Guest, Sep 12, 2019
HARARE- Zimbabwe’s Central Bank has for the first time since its introduction of a quasi-currency in November 2016, surpassed the initial set threshold of $500 million.
According to RBZ’s latest monthly economic report, the total amount of Bond Notes issued between November 2016 and June 2019 stood at $510 million.
June marked the first time since the currency’s promulgation, that the bank has gone beyond the $500 million targeted mark, as the government battles to contain cash shortages.
In November 2016, the RBZ said it was introducing the Bond Note, as an export incentive to encourage export and boost local production. At that point the Bank reported that the note was guaranteed by a backing facility of equivalent value held by regional lender Afreximbank.
In successive months, the note was funneled into the market initially tracking exports, a move which allayed inflationary fears as the injection was production linked.
However due to the debilitating economic situation, emerging inflation emanating from increased money supply via untamed Treasury bills issuance resulted in a tiered pricing model in the economy.
The exercise of government TB issuance which escalated in 2014 had resulted in excessive accumulation and by late 2016 the financial sector was failing to clear US transactions at 1:1. By 2017, a foreign payments backlog began to emerge while the market embraced the 3 tier pricing model.
RTGS and bond note transactions attracted a premium to the USD and the former accounted for the bulk of transactions in the economy. Given the sharper growth in money supply, the variance in value between the RTGS and bond note equally grew, more so at the point of dedollarisation.
Given the total money supply levels of close to $14 billion, the pressure on the few notes at $510 million is seriously mounting creating a huge premium between the bond note and the RTGS money.
[caption id="attachment_9911" align="aligncenter" width="979"]
changes in money supply over time[/caption]
Normal economies typically operate with at least between 10 to 15% of total money supply, in the form of notes and coins, a ratio that has been grossly elusive.
Earlier this year, government announced that it would increase the amount of hard cash in the economy by issuing more notes, estimated then to be in the region of $400 million. This was before the announcement that a new currency was due to be released to support the mono currency which came into effect in June.
Government is grappled with finding the right monetary balance as the exchange rate worsen and inflation follows same. Introducing a new currency would be perceived by common folk as inflationary and therefore spur price increase. It would also be difficult for government to introduce the currency before the Zimdollar stabilises in trades against other global currencies.
Recent weeks has seen the local currency plummet against the USD to levels close to USD/ZAR pair of 1:15, while more downside is still visible. The option to print a totally new currency is thus being deffered presumably targeting a more stable exchange rate.
This has left government with only 1 option and that is to print more Bond Notes.
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