Sunday, 25 September 2016

BOND NOTES UNNERVE INVESTORS

The impending bond notes appear to have scared away prospective investors who have now adopted a wait-and-see attitude — waiting to see how the market will react to the pseudo currency.

In his mid-term monetary policy review, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya said bond notes in denominations of $2 and $5 would be issued next month as part of the $200 million export incentive facility guaranteed by the African Export-Import Bank.
He said bond notes worth $75 million would be in circulation by the end of December.
Sources told Standardbusiness that research had shown that investors were afraid to take out money from their investment with bond notes in circulation.

“Foreign investors are going to be spooked by the spectre of this [bond notes] being somewhat of a backdoor entry of the Zimbabwe dollar. They cannot understand it as it is of no value to them. For them, what makes Zimbabwe attractive right now is the fact that they can get dollars. So, any threat to that scenario frightens them and they become uneasy,” the source said.

The source said the announcement of the arrival of the bond notes came when investors were already expressing anxiety after Cabinet rubbished proposals by Finance minister Patrick Chinamasa to cut salaries and suspend bonuses for civil servants as a way to create more fiscal space for government.
Cross-border traders said bond notes had to be convertible 1:1 with the United States dollar, failure of which would result in the immediate emergence of the black market for the greenback.

“If the bond notes are not readily convertible to the United States dollar, this will force traders to start looking for foreign currency itself as opposed to bond notes because local traders rely on foreign currency,” said Zimbabwe Cross-Border Traders’ Association secretary-general Augustine Tawanda.
About 3 840 cross border traders are believed to be leaving the country on a daily basis to buy goods for resale.
 

Financial analyst Persistence Gwanyanya said the export incentive facility would partly alleviate cash shortages in the local economy, which had been losing significant sums of money through illicit financial outflows.

“In its original sense, localising some portion of the currency would make economic sense as it minimises the occurrence of externalisation. The country lost an estimated $1,8 billion in illicit financial outflows in 2015, which is more than 30% of total deposits and this is unsustainable,” he said. 

“This [export incentive] concept supported by the current and capital account controls in place together with increased uptake of plastic money will go a long way in improving the cash situation in the country.”

Gwanyanya said there was no reason to insist on the dollar usage in local transactions, adding that no country in the world would sustain such a situation.

RBZ insists that bond notes are an anti-money laundering measure as depositors were holding onto the cash. RBZ said between May and September, the banking sector exported $250 million but the bulk of it was being held outside the banking system.

Gwanyanya said there should be measures to sustainably rebalance the economy towards increased production and exports, while reducing consumption and reliance on imports.

“There should be more focus on production at the moment, especially given the high levels of consumption in Zimbabwe,” he said.

Consumer Council of Zimbabwe (CCZ) executive director Rosemary Siyachitema said there was need for more education about bond notes.

“I think that more and more people are getting to understand what is intended by the bond notes and how they will flow into the economic system, just as the bond coins did. However, I think there is need for more education as consumers learn more about bond notes. We [CCZ] are going to ensure that it is part and parcel of consumer education,” Siyachitema said.

Retailers have said they will embrace bond notes the same way they accommodated bond coins.
Confederation of Zimbabwe Retailers president Denford Mutashu said the fact that the bond notes would be at par with the dollar and the setting up of an independent bond to ensure that bond notes would not exceed the $200 million guarantee had removed scepticism over the currency.

“The export incentive stands to boost local production and create more employment opportunities for the people who, in turn, will increase our customer base that has been shrinking,” Mutashu said.
Confederation of Zimbabwe Industries president Busisa Moyo said the lack of cash impeded business activity and in the first half of the year, most businesses went down by 15% to 30% on volumes.

“Having a widely accepted medium of exchange improves economic activity so the festive season and opening of schools next year should see a more liquid economy which can actually purchase goods,” he said.

“Swiping and plastic money penetration is still very low and below 10% of the active population.”

However, Moyo said the incentive should have come in the form of the South African rand.
Zimbabwe National Chamber of Commerce president Davison Norupiri said he expected that as time passed, the bond notes would be accepted by the business community.

“If they are distributed and sent into the market, according to what he [Mangudya] said, it is really not going to be that bad to the economy. There is going to be liquidity and obviously the queues will be wiped out from the banks. But at the same time, there are people who always try and be careful with the way they trade,” Norupiri said.

Exports, which contribute over 60% of the liquidity flows into the country, totalled $1,12 billion for the first half of the year, a decline of 9% from $1,23 billion recorded in the same period last year.
RBZ has also put a 2,5 to 5% incentive to drive remittances amid indications that $1 billion was being channelled through the informal system annually.

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