Bond notes hold ground

BOND notes, which were introduced by the Reserve Bank of Zimbabwe (RBZ) in November to fund export incentives meant to boost domestic production, have so far defied predictions of creating a catastrophic currency black market.

In Harare's currency black market hotspots such as the Roadport terminus for regional passenger transporters, bond notes were this week trading at 1:1 to the greenback with the few pockets of small-scale traders who tried to charge a premium to desperate customers finding no takers.

Currencies which were openly traded on the black market were the South African rand, the United States dollar and the Botswana pula.

The rand and the pula have remained in high demand from people travelling to South Africa and Botswana, but the local market appears to have embraced bond notes for transactions.

By December last year, the central bank had paid 80 percent of exporters, including diaspora remittances, through the issuance of US$73 million in bond notes.

The first tranche of bond notes released on November 28 was worth US$10 million.

This week, economists said careful management of bond notes by the RBZ had kept the black market at bay.

"The scarcity of bond notes is sustaining their value," said economist, John Robertson.

"The Reserve Bank of Zimbabwe has been clever enough to keep them scarce. The value conferred in bond notes is their scarcity. But we are still in danger. The causes of the problem have not been addressed; they have not gone away. There are a lot of separate issues that must have been attended to," said Robertson.

Asked if a black market could emerge in the coming months, Robertson said the rate at which the central bank would release bond notes would determine if the black market would emerge.

"Whether a black market will emerge will depend on how fast they increase issuance of bond notes. If this is done in the next few weeks we may have a black market. But if they release more bond notes a few months from now, that may not happen. There is need for very careful management by the RBZ," he added.

Analysts fear that should government fail to pay its obligations this year, including salaries, it may direct the central bank to release more bond notes.

These fears had disappeared from 2009, when government adopted the multi-currency system and stopped printing its own currency.

"If government says we want more bond notes to pay salaries, that will place the value of bond notes at risk," said Robertson.

Factors that had have been cited as contributing to the liquidity crisis include lack of confidence in the economy, externalisation of up to US$2 billion per annum in the past few years and trade imbalances arising from high imports and depressed exports.

In November, a Cabinet advisor said about US$358 million in cash had been spirited out of the banking system by depositors over a period of five years.

Ashok Chakravarti, a Cabinet advisor, said banks held about US$627 million in cash in 2010, which represented 38 percent of total sector deposits.

He told a Confederation of Zimbabwe Industries public lecture in Harare that deposits had declined to US$269 million, far below the 10 percent threshold of liquid cash required to sustain an economy.

The US$269 million represented about six percent of US$6 billion in total banking sector deposits.

The introduction of bond notes has so far failed to address the cash crisis.

Foreign investors who had invested in Zimbabwe when the country switched to a multi-currency system are also reportedly withdrawing their money from banks, worsening the cash shortages that are currently affecting the market.

The stampede to withdraw cash from the banking sector increased last year after the central bank announced plans to introduce bond notes, as analysts feared this was government's first step towards resurrecting the Zimbabwe dollar.

Like Robertson, other economists believe government could soon start running its printing press, churning out bond notes to fund a number of its commitments and buy foreign currency from the market for its external obligations.

This, it was feared, would result in another hyperinflationary scourge probably of the magnitude witnessed in 2008 that forced the country to abandon its currency.

The initial release of bond notes through the financial system was in small denominations of US$2 notes and US$1 bond coins.

Kingstone Kanyile, the chief executive officer at Mtlikwe Financial Services, said the smaller denominations have helped the RBZ to stiffle the black market.

"Bond notes came in as a controlled currency," he said.

"The governor has not pumped in the currency recklessly. He has had a tight control over the surrogate currency. Smaller denominations such as $2 bond notes and coins are difficult to create a black market because they easily become bulky. So long as they are controlled and they continue to import United States dollars for their external obligations, the opportunity for a black market is little. But there are a few people who may be doing it in very desperate situations," he added.