US dollar notes disappear, authorities fingered

ZIMBABWE'S fragile economic situation is lurching towards fresh depths amid indications that small United States dollar denominations are disappearing from circulation, thereby raising the possibility of a change crisis, the Financial Gazette reported.

The development has triggered speculation of a conspiracy to mop up the small denomination US dollar notes to pave way for the planned introduction of bond notes of similar denominations by the Reserve Bank of Zimbabwe (RBZ) at the end of next month.

Despite widespread resistance against the proposed introduction of bond notes, government is proceeding with the introduction of the domestic currency which, it insists, is a surrogate of the US dollar - the major currency under Zimbabwe's multiple currency regime.

RBZ governor, John Mangudya , announced this month that the central bank would release bond notes in $2 and $5 denominations at the end of October before eventually introducing higher value bond notes in $10 and $20 denominations.

These would later be followed by $50 and  $100 bond notes.

The bond notes would rank pari pasu with the greenback, he said.

Apparently, it is the US$2 and US$5 notes whose equivalent bonds notes denominations the central bank plans to unveil next month that are disappearing from circulation.

Denford Mutashu, president of the Confederation of Zimbabwe Retailers, said the level of cash handled by retailers had generally gone down.

"The usage of smaller denominations as change in the retail industry is now also an issue. We are trying to investigate why their levels have declined," he said.

Mutashu said they had observed that people were "avoiding banking cash because the many times they have to withdraw it is costing them in terms of bank charges".

"Even other electronic payment platforms are now discouraging people from bringing cash into the formal system because they are failing to give people cash on demand," Mutashu said.

No comment could be immediately obtained from the RBZ and the Bankers' Association of Zimbabwe by the time of going to print.

While the bond notes were initially said to be part of a US$200 million incentive for exports, the RBZ has now indicated that the bond notes would now be widely available, with suggestions that these may be printed to support Treasury which is battling to pay salaries.

Critics and the public fear this will inevitably mark the return of the dreaded Zimbabwe dollar, which was abandoned after the country lurched into an uncontrollable hyperinflationary crisis that battered the value of the domestic currency.

The local currency's final days in circulation were marked by anarchy after being hammered by hyperinflation that reached a record 500 billion percent in 2008, wiping out life-savings and impoverishing an entire population.

Although Zimbabwe has experienced a shortage of bank notes that had been largely blamed on externalisation of high value physical notes, it has turned out much of the cash now in circulation within the banking sector had no backing of real US dollar currency, as it was being generated by government through the real time gross settlement system (RTGS) and Treasury Bills.

Therefore, no physical notes could be imported to back this phony cash, which only existed on the virtual banking platforms.

This then triggered the shortage of notes, which resulted in tight withdrawal limits and long queues at banks as depositors sought to withdraw their money.

The dwindling of smaller US dollar notes denominations, does not suggest externalisation, but a possibility that a third force may be mopping them out of circulation to abet the planned introduction of bond notes.

The possibility of externalising US$2 and US$5 notes is remote, considering that most of these small denomination notes have been circulating while torn, damaged, badly soiled and dirty.

Analysts said they suspected that authorities may be planning to leave very little options for people who would be forced to either accept the bond notes or resort to the electronic payment system through current cash shortages.

They said even the shortage of high value US dollar bank notes was meant to leave people with very limited options.

Economist, Trust Chikohora, said the country was headed for a major crisis and the disappearing US dollar bills were indicative of a system failure.

"I cannot comment more on the disappearance of some ranges of notes, but I think it is linked to the problem we now have with the RTGS where we just have balances in our accounts, but there is no real cash to back the balances," Chikohora said.

Chikohora also noted that the country's cash crisis was so deep that the outlook was bleaker.

"Foreign currency is used as a reserve currency, which caters for external payments. In our case we do not have a local currency and we have no reserves. We are living from hand to mouth. If externalisation of the foreign currency continues, we will be unable to service our imports. This has already started happening. Yes, we are running out of currency and we will end up in crisis, in the absence of balance of payment support," he said.

Buy Zimbabwe Trust chief economist, Kipson Gundani, said while speculation was largely driving events in the economy, the situation in the country had reached levels that it had become difficult to trust authorities.

"When a significant policy is announced, people always contemplate the outcomes and try to take the safe option. Some may want to say that the RBZ is sitting on the money, but I doubt if this is the case. In the past few months the RBZ has actually been importing smaller denomination notes to discourage externalisation, so we expect this range of notes to actually be more in the system. But we cannot trust authorities, no matter how sincere they look."

There are fears that the current situation could trigger unprecedented volatility in the banking sector, frustrating efforts to stabilise the economy.

IH Securities said the stock of hard cash in banks plummeted since January last year.

"Hard cash in the banking system has fallen from US$260,4 million in January 2015, (accounting for 5,8 percent of deposits) to US$118,2 million in May 2016 (being 2,0 percent of deposits); this clearly poses risk given that hard cash should constitute about four percent of total deposits at any given time prudentially," IH Securities said in its report entitled: Banking Sector, Surviving in a Cashless Economy.

"The country needs roughly US$200 million circulating within the system at any given time to maintain adequate liquidity, but this threshold has proven difficult to achieve given the phenomena of mass externalisation as confidence in the system falls. The sector was severely affected by a squeeze on liquidity, which has now metamorphosised into hard cash shortages, driven by…a culture of externalisation," the report added.

Mangudya has battled to calm market fears that a decision to inject bond notes into the economy, ostensibly to fund a five percent incentive for exports, was not an attempt to reintroduce the Zimbabwe dollar.

The domestic unit was dumped in 2009 to pave way for a multi-currency system that had generally stabilised the markets until detrimental cash shortages returned last year.

Public despondency over the bond notes has swelled, amid reports that millions of dollars were being wired out of the system by panicky consumers, unnerved by a fresh wave of losses should the central bank bring bond notes.

A staggering US$250 million was siphoned out of the markets by jittery depositors between May and early September this year, according to Mangudya in his defence for the bond notes.

He said banks were importing about US$15 million per month to meet the huge demand for cash, also suspected to have been caused by foreigners coming into the country to cut back stage deals to gain access to hard currencies.

"Between May and September we imported US$250 million," Mangudya said when he presented the Mid-Term Monetary Policy Statement three weeks ago.

"It is not in banks, we are not seeing it. The funding mechanism of the export incentive scheme will be through bond notes in order to preserve the offshore US$200 million countercyclical facility that has been arranged to support the export bonus scheme from externalisation or capital," he added.

A spike in parallel market activities witnessed in currencies recently has aggravated the crisis, which has been highlighted by long queues in banking halls, failure by banks to honour withdrawals, and failure to fund offshore commitments on time.

Government, which has struggled to find a lasting solution to the deteriorating liquidity crisis, has a huge task ahead.

Two of the fortresses that have defended the economy – tobacco and gold exports - have failed to improve the liquidity situation.

"We foresee initial resistance to the bond notes on introduction, but believe that to promote confidence there will have to be a strong mechanism that allows both corporates and individuals to easily redeem these notes into hard currency when necessary," said IH Securities said.

Old Mutual Securities (OMSEC) warned that the nation should brace for a deeper cash crisis.

"Given a persistent negative current account balance, the liquidity situation is expected to progressively deteriorate. Cash demand will be significantly curtailed by the use of plastic money. However, in the absence of a recovery in the manufacturing sector, the trade balance will remain in deficit thereby perpetuating the current liquidity crunch," said OMSEC.

Financial markets expert, Ngonidzashe Makaha said, hyperinflation had severely dented confidence in the system resulting in the proliferation of a strong cash culture supported by the largely informal nature of the economy.

He said when Zimbabwe adopted the multi-currency system in 2009, with the US dollar as the primary currency, broad money supply was relatively weak.