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Being optimistic with bond notes

14 Aug 2016 at 07:56hrs | Views
The government's plans to introduce bond notes in October this year has been under much criticism and attack from the general public but it is also wise to analyse the other positive side of this policy in order to fully explore and understand the policy maker's intention. The $200 million bond notes will be backed by a loan facility from the African Export-Import Bank and will be launched at par value with the United States dollar.

According to the Governor, the bond notes will only work as an export incentive and exporters will start redeeming their 5% incentive that accrued starting May 2016 upon the bond notes launch in October. The central bank Governor, Dr John P. Mangudya also said the bond notes will be added in the multicurrency basket that is mainly dominated by 95% US dollar.

The RBZ boss said ‘it is well' to launch the bond notes despite the resistance that the authorities has faced from economic agents. The success of this policy depends much on the Central Bank Independence, which is the freedom of the policy maker from direct political or governmental influence in the conduct of policy. The monetary authorities should stick to their promise of printing only $200 million bond notes and nothing more unless if there arise a good economic reason to increase the amount.

It is understood that the US$6 billion Zimbabwean economy cannot be diffused by a mere $200 million bond but the major fear of economic agents is on whether the monetary authorities will be able to resist the political pressure to print more, especially ahead of the 2018 elections.

The initial motive of the monetary authorities to launch bond notes in order for them to act as an export incentive scheme makes a lot of sense. Whenever a company exports goods outside the country and bring foreign currency into the country, the company will be given a voucher of 5% the value of the goods exported that it will redeem in the form of bond notes. This incentive will encourage and attract more firms to employ more resources and be geared on producing more for exportation.

This will increase the amount of foreign currency inflow in Zimbabwe and this can act as a permanent solution to the liquidity crisis that is currently looming in our country. This export incentive scheme is being complemented well by the recently gazetted Statutory Instrument 64, 2016 that is meant to limit the importation of commodities that are deemed to be capable of being produced locally. This will go a mile stone in helping to revive our local industries that have been facing too much competition from foreign produced goods.

Zimbabwe is the only country in Africa that is using the United States dollar as a trading currency and not as reserve currency. Due to the poor economic situation in Zimbabwe including low production levels, many countries had viewed our country as a ‘fishing pond' for the much needed US dollar through bringing imports. Countries like China has been understood to have been dumping commodities here in Zimbabwe like when a wheelbarrow was reported to have been landed here at a cost price of US$2.98. These actions are not health for the economy and it was wise for the government to craft policies that protect our local industries and policies that reduce money flight.

In United States, it is illegal for an individual to be seen with more than US$10 000 cash as this is deemed to be money laundering but in Zimbabwe individuals were being allowed to withdrawal any amount without limit until recently when the central bank boss had to put limits on withdrawals and the amount of cash that individuals and companies should take outside the country. In support of this, the monetary authorities have launched the National Financial Inclusion Strategy (NFSI) that is meant to promote the use of plastic money.

The government has in the past years tried to subsidies production, especially in the agricultural sector by giving farmers inputs. Even recently, the Vice President Emmerson Mnangagwa, who is the chairperson of the Food Security Committee has launched Command Agriculture Scheme in which the government is going to identify 400 000 hectares of land in the country's ten provinces and empower the farmers through giving them farming implements like machinery or equipment, seed and fertiliser.  Although this is a good policy that is meant at increasing food security in the nation through subsiding agriculture, but I strongly feel that incentivising production might yield more fruits than subsidising. However it should be understood that these two policies can complement each other as those farmers who were incapacitated to produce more due to lack of farming inputs can now strive to produce more for exports so as to get the export incentive. This will reduce importation of maize from outside and boost exports hence reduce income outflow.

Boosting exports through the export incentive scheme would mean more income inflow into the country. Income from exports is a form of income injection into the economy. This income will be received by households which will mean an increase in their purchasing power. This will cause the internal demand of goods and services to increase, firms will respond by employing more factors of production and then boost output of goods and services. National income will increase through the multiplier effect.

When firms are expanding their production scale, they will demand more labour in order to produce more goods and services. More people will be employed hence reduce the current unemployment rate of 89%. Workers employed will receive more income which they will use to buy more goods and services produced. This will create a virtuous circle of growth. In other words, this export incentive scheme can be seen as a triggering mechanism to kick start economic growth.

Although export incentive scheme through bond notes and agricultural subsidies can be viewed as forms of trade barriers as they give Zimbabwean exporting firms a competitive advantage over other firms in the international markets, but it should be understood that the policy isn't peculiar to Zimbabwean situation alone as our trading partner, South Africa is understood to be giving higher export incentive of up to 15% especially to certain selected products like fridges. Being optimistic about this policy will help us to achieve our ultimate goal. All economic agents should join hands in upholding and promoting the success of the policy.

Zimbabwe is losing a lot of gold due to traders smuggling it into South Africa where the exporters are understood to be given export incentive. Our export incentive scheme will lure traders to follow the formal way of trading gold, hence increase our gold output and the income received from selling the precious mineral. Increasing income inflow will solve the liquidity crisis and will bring the much needed US$ into the country.

The monetary authorities are advising the nation not to be sceptical about the bond notes issues as it will help, together with other policies put in place, to boost production and economic growth. Although economic agents have suffered a lot during the Dr. Gideon Gono era and are still being haunted by those memories, it should be made clear and understood that this regime is now a different one and economic agents should plough their confidence on the current governor in order to fully harvest the fruits of the purported policy. If the bond coins have once worked, then it is wise to use that same confidence in upholding and promoting the success of the bond notes.

Blessing Machiva is an economist and he writes in his own personal capacity. Criticisms and comments can be forwarded to machiva.blessing@gmail.com or WhatsApp number +263 773 836 435.  




Source - Blessing Machiva
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