Reserve Bank of Zimbabwe Governor Dr John Mangudya, in co-operation with the Ministry of Finance and Economic Development, is certainly making his loans from Afreximbank work very very hard.
These facility loans are expected to perform a triple function: Providing the short-term and medium-term foreign exchange liquidity needed by exporters who directly or indirectly rely on some imported materials, funding the export incentive schemes whereby exporters get up to 5 percent extra for their sales, and providing a fixed limit to the amount of bond notes in circulation and in effect backing these notes.
All three purposes have merit, but Dr Mangudya is still increasing risks by making the facilities work so hard, especially as at some stage Afreximbank is going to want its money back; it is not a charity.
The first purpose, helping exporters with vital foreign-exchange liquidity, is the easiest to defend and is in fact the main reason why the bank has granted the facility.
Sometimes exporters need a limited amount of foreign currency for a short time; this would be the case for a company that needs to import say $1 million of raw materials to make up an order of manufactured goods that it sells six weeks later for $2 million, which includes the value added in the Zimbabwean processing and Zimbabwean raw materials, and the country is ahead in its balance of payments even after paying back the foreign exchange.
Sometimes there is a longer value chain. For example fertiliser companies need to import some of the raw materials to make the fertiliser, adding value, that farmers use to grow tobacco and cotton, adding some more value, that is processed in Zimbabwe, adding yet more value, and this product is sold to a foreign buyer who eventually pays more than a year after the fertiliser company placed its order for materials. So once again a modest facility has generated a lot more foreign currency and the bank can be repaid.
Even export incentives, in effect a subsidy, make sense. First it makes Zimbabwean exports more competitive and mitigates the problem that using someone else’s currency can create.
Secondly these extra incentives generate more wealth in Zimbabwe and in business. This is important because in the end the taxpayer has to fund the incentives, but the extra business generated should generate enough VAT, PAYE and company tax that the Finance Ministry is covered with some useful extra change. And so Zimbabwe has both the tax cash and the extra foreign cash to repay the bank.
The final purpose of backing the bond notes is slightly trickier. Dr Mangudya is well aware of the dangers of printing money without limit or backing. But there is only a tenuous link between borrowing foreign currency and printing a non-externalisable banknote.
We agree that replacing US dollar notes with notes that cannot be used outside Zimbabwe tends to thwart smugglers; we agree that making it easier to transact business in Zimbabwe, especially for small sums and in rural areas, helps business grow.
But this third function only makes sense if Zimbabweans treat banknotes in general and bond notes in particular in the same way they treat their swipe cards and their mobile wallets, as a useful way of greasing the wheels of commerce.
Unfortunately, as Dr Mangudya himself notes, too many see banknotes as a way of storing wealth and as a commodity that can be bought and sold. Increasing supply will at least come closer to saturating markets and reducing the incentives for both.
But the solution for shortages of cash is not more notes but more use of digital money, something that is happening in many countries with Kenya probably the African leader. If Kenyans want to use banknotes they can, but almost all of them find using their phone a lot easier, safer and cheaper to buy anything from a bus ticket to a car.
The RBZ needs to continue pushing digital cash, working with banks and mobile telecommunications companies, to reach the stage where Zimbabweans no more think of using an ATM than they would of trying to find a phone box or a postage stamp to communicate with their friends.
Then the Afreximbank facilities can be limited to their true purpose, of boosting Zimbabwe’s exports so that we actually have enough foreign currency to do all we want to do with it.