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RBZ's monetary policy statement: 'It's the bond notes, stupid'

by Colls Ndlovu, economist
07 Oct 2018 at 14:26hrs | Views
The monetary policy statement issued by the Reserve Bank of Zimbabwe (RBZ) on 1 October 2018 served as a precursor of how the new dispensation will handle economic and financial policies going forward. In particular whether there is going to be coherence or incoherence between the objectives of the broader ministry of finance and the narrower monetary policy as articulated by the RBZ.

Judging by the assertions issued by the new minister of finance pursuant to his appointment, and the statement issued by the RBZ on 1 October 2018, there is a degree of incoherence. Whether the mixed signals are by design or by default is unknown and unknowable. The minister of finance , Prof Mthuli Ncube was unequivocal in articulating his intended position going forward , that is, removal of the toxic bond note, possible adoption of the already adopted US dollar, or adoption of the equally already adopted South African rand through joining the rand monetary union, and to cap it all, ultimately bring back the Zim dollar.

The monetary authorities have failed to take a lead on this critical issue. Instead of the general populace ring-fencing these policy initiatives and interrogating them, the debate and the actions of the monetary authorities have veered off track and the whole thing has been distorted either through obduracy or obfuscation or both. Prof Ncube's assertions have been distorted and misinterpreted.

A cursory look at the RBZ's monetary policy statement shows that there was a tardy and skimpy reference to the bond note. It befuddles the mind how such a central variable like the bond note could be conspicuously ignored in a monetary statement which was widely watched by the investment community. How does a central bank issue a monetary policy statement without even a footnote reference to the bond note yet the bond note is at the centre of the country's financial imbroglio??

It can be argued that a great opportunity was missed in terms of issuing an unequivocal statement that could stabilize the financial markets, pacify the investors and put Zimbabwe on a reasonably sound economic footing.

The RBZ's statement unwittingly admitted albeit indirectly that the bond note is not equal to the US$ but at the same time paradoxically insisted that the parity of 1:1 will still be maintained notwithstanding the realisation that the bond note (and its electronic self, the RTGS) is not equal to the US$.

The drawing of distinctions between RTGS and actual US$ balances is an interesting one. Interesting because at inception every RTGS would have been originally denominated in US$s and rated at 1: 1 to the bond note, but the change occurs as these balance are moved around through onward payments and transfers. By this action the RBZ has all but agreed that the RTGS (read the bond note) is not equal to the US$. Having inadvertently agreed per above that the bond note is not equal to the US$, the RBZ paradoxically still maintained the parity of 1:1 between the US$ and the bond note (in other words even if they now agree that the bond note is not equal to the US$ they still insist that it is equal).

In the United States, in the mid 1990s, former US president famously said, "it's the economy, stupid". In Zimbabwe this can be adapted to read, " it's the bond notes, stupid". Judged by its own monetary policy statement, the RBZ does not seem to understand that the bond note (together with its electronic derivative called the RTGS) is at the core of Zimbabwe's financial imbroglio. The problem is that people tend to believe what is in their heads even if such beliefs have failed them dismally in the past. Already there is a trending and sustained narrative which seeks to give an impression that Prof Ncube has reversed his statement regarding his objective of removing the bond note. Ironically, no-one has had the necessary stomach to quote him saying so (a clear indication that these assertions are a mere figment of people's imaginations).

It is clear that the current financial strife afflicting the Zim economy is being used as a ploy to stop the intended removal of the bond note. Prof Ncube himself made a very unfortunate and reckless statement by telling the world that he will "ultimately" bring back the toxic Zim$. The markets (businesses, consumers, buyers and sellers) do not even want to wait for the return of the poisonous Zim $ because in their minds, they think that there shall be a decree forcing them to surrender the bond notes, in exchange for the Zim dollar. That is also what is causing the ongoing price distortions, currency manipulations, inter alia.

The RBZ's argument that the cause of the financial problem is the RTGS balances is a tacit albeit unwitting admission that the bond note is the cause of the problem. The fact of the matter is that the RTGS balances are a derivative of the bond notes. That is to say, the RTGS are the electronic version of the bond note. The RTGSs are underwritten by the bond notes. That is the horse they are riding on. Both are not real money. The only difference between them is that the bond note has a physical presence where as the RTGS has no direct physical presence in people's hands. Remember in every situation, and in every currency, there is always a spread (difference) between the valuation of a dollar in hand and a dollar at a bank account. The difference between the physical bond note and the electronic bond note (the RTGS) is simply being bigger because of the obvious uncertainty surrounding the bond note and its relationship with supposedly forthcoming Zim dollar.

A US$ in hand has more value than a US$ at a bank account. There is more risk with the dollar at a bank than the one under your mattress. For example, the bank where you deposited your dollar can collapse tomorrow and you lose your deposit. Your mattress will never default

The new directive that foreign truckers must now buy fuel in Zim in foreign currency only (not in local RTGS balances) , on the face of it looks good, but the tragedy is that foreign truckers will now simply fill their tanks either in Musina (SA), Livingstone (Zambia) or Francistown (Botswana) or Beira (Mozambique).

The good thing that came out of this monetary policy statement is that if you deposit your money in hard US$ whether via transfer from abroad or through actual physical deposits, that account will be maintained in those US$. There will be no co-mingling with the RTGS.

Incentives for exporters are good. The fact that they now keep all their export earnings with the exception of those who export certain minerals is a positive outcome.

Finally, this monetary policy statement has not addressed the fundamental problem of the Zim financial system which is the pari passu valuation of the bond note at 1:1 with the US$. This is the main source of the currency distortions in Zimbabwe, and the Achille's heel (source of vulnerability) of the Zimbabwean financial system. Unfortunately if the bond note is swept under the rug or kicked into the long grass (and allowed through some abracadabra economics) to continue with its distorting 1:1 valuation to the US$, the country's financial crisis will intensify and get worse.

The monetary policy statement itself, was more of a bitter-sweet fruit salad. A case of all animals being equal but some animals being deemed to be more equal than others (the 1:1 equality between the bond and US$ while acknowledging that the RTGS is not equal to the US$ yet the RTGS is an electronic bond note).

Ndlovu is an independent economist who spent 16 years in central banking. In 2005, he completed an advanced programme on financial institutions and derivative financial instruments at the IMF Institute, in Washington DC. He writes in his personal capacity.

Source - Colls Ndlovu, economist