Tuesday 23 January 2018

Zimbabwe boosts ‘bond note’ parallel currency by $300m

Zimbabwe boosts ‘bond note’ parallel currency by $300m
(Financial Times 08/04/17)
Zimbabwe boosts ‘bond note’ parallel currency by $300m

Move raises fears notes are paving way for return of country’s dollar.

Zimbabwe’s central bank said it would more than double the printing of “bond notes” as cash shortages worsen in the dollar-dependent southern African nation.

John Mangudya, the governor of the Reserve Bank of Zimbabwe, said on Wednesday that the bond notes, a parallel currency launched last year that is officially equal to US dollars in value but trades at a discount, would be printed “on a drip-feed basis” from the end of August.

The central bank says the $300m boost, which will bring the total value of bond notes in circulation to $500m, is being funded with loans guaranteed by African Export-Import Bank (Afreximbank), a Cairo-based lender.

The increase would bring the amount of bond notes in circulation to more than half the physical US dollars left in the country, raising fears that the notes are paving the way for the return of the Zimbabwe dollar, which was withdrawn after hyperinflation in 2009.

“The inefficient circulation of money is significantly causing shortages of cash in the formal economy and the banks,” Mr Mangudya said, blaming “wayward market indiscipline” for a continued drain of physical money from circulation. Afreximbank could not be reached for comment.

Zimbabwe’s economy has been haemorrhaging US dollars, the most commonly used of several foreign currencies adopted since 2009, to pay for imports under a trade deficit of $1.5bn, about 9 per cent of gross domestic product. Years of political instability have crippled the economy, triggering a collapse of foreign investment.

The problem has been exacerbated by the turmoil that has flared up in the ruling Zanu-PF, led by Robert Mugabe, who at the age of 94 has resisted naming a successor ahead of presidential elections due next year that he is contesting after 37 years in power.

Ordinary Zimbabweans are also piling up dollars at home, despite banks limiting account withdrawals to as little as $50 a day and payments increasingly being made using mobile phones or cards.

The central bank says there are still about $800m in physical US dollars and other foreign currencies in circulation, but the International Monetary Fund estimates that the number of US dollars could be as low as $600m.

“With its link to the US dollar increasingly tenuous and lacking a strong anchor, confidence in the domestic monetary system could weaken rapidly,” IMF economists recently said in a report on Zimbabwe’s economy.

The number of so-called “electronic dollars” in the banking system has ballooned with the government financing a fiscal deficit of 9 per cent of gross domestic product using a central bank overdraft and issuing Treasury bills — short-term government bonds — to local banks.

Electronic dollars are worth up to a fifth less than in real dollars in informal parallel market trading versus a 5 to 7 per cent discount for bond notes, according to the IMF. Speculation after the November introduction of bond notes that they would rapidly lose their value has so far been kept in check by their relative scarcity.

“Allowing large cash withdrawals would imply a run on the banks which would collapse the financial system,” John Legat, chief executive of Imara Asset Management Zimbabwe, said in a recent note to clients.

Joseph Cotterill in Johannesburg and Tony Hawkins in Harare

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