LATEST: 'More citizens shun bond notes in favour of more stable US dollars'

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Zimbabwe is undergoing bond notes substitution and progressive unofficial dollarisation, economists have said.

This comes as more citizens are shunning the national currency in favour of the historically more stable US dollar.

Zimbabwe abandoned its inflation-ravaged Zimdollar in 2009 and adopted a basket of foreign currencies. Since then, the US dollar has been the main currency for transactions, as well as the South African rand.

Despite introducing a surrogate currency, the bond notes in 2016, in recent years a cash shortage has been slowly strangling the economy, which is half the size it was at the turn of the millennium.

The government initially issued $200m worth of bond notes — at par with the US dollar — in November 2016 in an attempt to ease cash shortages.

Zimbabwean firms resorting to the black market to get US dollars are forced to pay a premium.

This premium is ultimately absorbed by consumers through final goods and services price increases.

Nevertheless, downward price pressures persist due to tight liquidity, and the Reserve Bank of Zimbabwe (RBZ) has already injected nearly all the funds available for bond note issuances into the economy.

The RBZ has progressively introduced additional millions worth of bond notes once negotiations with the Afreximbank to secure an additional loan to back these notes were completed.

Both the World Bank and International Monetary Fund (IMF) have expressed worry about the bond notes losing their value against the US dollar, thereby fuelling inflation.

Both institutions have rather similar views, forecasting inflation to continue rising.

The latest October inflation print marks the highest levels since 2010, as a severe shortage of foreign exchange restricts supplies of basic commodities.

Inflation shot to 20,85 percent year-on-year in October from 5,39 percent in September and on a monthly basis, prices jumped by 16,44 percent during the same period from 0,92 percent in September.

Zimbabwe’s October inflation raced to its highest since 2008 following a surge in prices of cooking oil, flour and sugar as the country faces a dollar shortage.

Leading economic analyst Chantee Mathee said it was important that any additional bond notes be backed by equivalent amounts of US dollars to help defend their value.

Economists contend Zimbabwe is now under semi-official dollarisation, which is another name for a bi-monetary system where two distinct currencies are legally recognised and circulate simultaneously.

According to a Global Policy Forum (GPF) paper tilted Basics of Dollarisation written by renowned American economist Kurt Schuler, dollarisation occurs when residents of a country extensively use foreign currency alongside or instead of the domestic currency.

Economist Simbarashe Gwenzi told the Daily News on Sunday that the country was “indeed redollarising and most retailers are pegging their prices above parallel market rates for RTGS and also adopting a discounted USD price, with exception of a few.”

“This will eventually lead to the market preferring to make cash payments in USD terms to advantage of the discount.

“Scarcity of the USD balances will slow demand growth and that will cause prices to drop.

“We are in for a tough time in the short-term,” Gwenzi said.

The fluctuations in the prices of basic commodities, amid foreign currency shortages, have marginally increased the cost of living, thus devaluing salaries.

The dowsing of the bond note by the US dollar has perpetuated a Janus-faced market, conflicting government’s monetary policy which endorses the 1:1 parity of the currencies, economists said.

Expert economist Carren Pindiriri said the issue of redollarisation is difficult to assent due to the official position of the government, which has stated that Zimbabwe is still using the multicurrency system, although the private sector is indicating otherwise.

The intensification of foreign currency shortages has worsened the situation, with many businesses pegging prices against black currency market exchange rates, currently fetching anything up to 300 percent.

Renowned economist John Robertson told the Daily News on Sunday that the market is the determinant of the current trends in the economy.

“Businesses are charging US dollars for the survival of their business, because these are people who are giving employment to a majority of Zimbabweans who are paying tax.

“The monetary policy statement of October 1 is in conflict with the budget statement and at the same time Zimbabwe Revenue Authority (Zimra) is in conflict with the Reserve Bank statement made two years ago on bond notes.

“There is reason for government to formalise the US dollar and get rid of the bond notes and RTGS, but government can’t do that because there are foreign currency shortages,” Robertson said.

Another economist Brains Muchemwa, said: “In the current multiple-currency environment, the growing preference to price in USD reflects the desire by economic agents to preserve value of working capital, assets and earnings.

“Government has therefore an important role to play in preserving the value of RTGS considering that over 90 percent of the transactions on the national payments system are in RTGS,” Muchemwa said.

Reserve Bank of Zimbabwe governor John Mangudya asserts Zimbabwe does not have a currency crisis but a shortage of foreign currency, which he defined as a mismatch between the foreign currency the country is currently generating and demand.

His comments come as companies, holding US dollar-denominated bank balances, are struggling to make external payments for raw materials and machinery.

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