The RBZ says bond notes are an export incentive

The planned introduction of bond notes by the Reserve Bank of Zimbabwe (RBZ) sometime in October 2016 is likely to be met with market resistance.  This came out during the MEFMI Policy Seminar that was held on Thursday 7 July 2016 to discuss research findings from a study conducted by Dr. Albert Makochekanwa. Dr. Makochekanwa is the Deputy Dean in the Faculty of Social Studies, and Acting Chairperson of the Department of Economics, at the University of Zimbabwe.

The policy seminar was attended by 45 delegates including some of Zimbabwe’s most respected Economists and financial experts.  Mr. Farai Masendu, Deputy Director Foreign Exchange and Mr Ruzayi Chiviri, Deputy Director in the Bank Supervision Department of the RBZ were discussants, together with Dr. Nigel Chanakira, a seasoned banker and Financial Markets expert.

While the introduction of the bond notes was initially announced in May 2016 as a “Measures to deal with cash shortages whilst simultaneously stabilising and stimulating the economy”, the RBZ insisted that the bond notes should be viewed as an export incentive rather than a measure for primarily dealing with the cash situation.

Dr Makochekanawa conducted a research on public perception on bond notes within the first seven (7) days of announcement.  The research findings indicate that the majority of the surveyed economic agents were frightened by the announcement. The major reasons for the panic include the perception that there would be: (i) acute shortage of the US dollar (more cash crisis), (ii) shortages of basic commodities, (iii) the coming back of Zimbabwean dollar through the back door, (iv) growth of black (parallel) market for foreign currency, (vi) money printing by RBZ/government, (vii) inflation, (viii) bank run, (ix) raiding of company (individual) accounts by RBZ/government, and (x) shunning of Zimbabwe by foreign investors, among others.   To minimise the possible negative impact of Zimbabwe Bond Notes on economic activities, an overwhelming proportion of the surveyed economic agents indicated that they would withdraw all their US dollars from local bank accounts and keep the cash safely in their homes or buy property.

Given free choice and without any coercion to choose between US dollars and Zimbabwe Bond Notes as the medium of exchange, majority of respondents indicated that they would prefer to use the US dollar for two main reasons: that the   US dollar is a major international currency used in any global transaction, and a stable currency that one can use to make long-term budget plans.

There was consensus among the discussants that the introduction of Zimbabwe Bond Notes will have negative and unintended implications on the country’s economic activities, particularly foreign direct investment, manufacturing, and domestic savings.

Dr. Chanakira pointed out that while the RBZ says the bond note will now be used as an export incentive, measures must be put in place to ensure that the facility is not abused.

Prof. Ashok Chakravati warned the RBZ against repeating the same mistake of getting involved in quasi-fiscal activities which eventually caused the demise of the local currency.  He urged Government to design a much broader and more attractive export incentive.  “Zimbabwe should look at targeting non-traditional export incentives such as removal of tax on some exports such as by-products from the agricultural market.  It is possible for the Government to have a basket of at least 30 export products that get 10% incentive.”

Mr. Raphael Otieno, the MEFMI Director of Debt Management Programme, questioned the rationale of creating a US$200 million liability in order to create further liabilities. Government should have used other non-debt creating options to incentivise exporters, such as the use of tax incentives.

Please click here for a copy of the presentation