Bond notes, pricing and inflation

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Tinashe Nyamunda
It is increasingly evident that Zimbabwean bond notes are not as good as the real thing to currency smugglers. Officially, bond notes are still at par with the US dollars but with a small “export incentive”, call it an artificial exchange rate of some 5 percent. But the real value as expressed in the parallel market has since exceeded this.

In real terms, inflation has crept in since late 2016 and seems to be at the stage of walking in terms of different elements of pricing and exchange in the parallel market which is driven by those wanting to exernalise dollars.

Given that a year has nearly passed since the introduction of bond notes, it is opportune time to take stock of the monetary developments in the economy, both formal and parallel, and examine the effects this has had on ordinary people.

The article examines some money market activities, and in part, traces the stages that real inflation has moved. In this case, the conflict is between the official rate, represented by the 5 percent export incentive and the claim that the bond currency is at par with the US dollar and the parallel market rates which are more complex and will be untangled in what follows.

There are four main stages of inflation which I will use as a unit of analysis that is creeping, walking, galloping and hyperinflation.

The first stage is creeping or mild inflation, when prices rise by 3 percent or less. This is a best case scenario which the government wants to maintain, and going by official prices.

Unofficially though, just the price of money has since exceeded the 5 percent incentive and imported goods in some shops are denominated in three tiers pricing: that is, foreign currency, bond cash and electronic payments, including mobile money, where the premium ascends to anything above 25 percent of the foreign currency listed price.

This bond cash exchange rate with the US dollar represents a devaluation which falls within the walking inflation category. In this case, inflation will be between 3 and 10 percent.

Once prices and the rate of currency exchange exceed 10 percent, as is the case with electronic purchases generally and the parallel rate for transferring deposits for cash (kuburner), then the stage of galloping inflation will be reached. We have experienced all of these stages in the past year.

Major retailers still keep prices the same for all goods regardless of method of payment.

The banknote shortage in the country is worsening, with some banks such as Barclays giving bond cash withdrawals, mostly in coins, of no more than $100 per week.

Most banks give out bond $20 per day with the highest being bond $40. But to get this cash, most of which is denominated in coins, one needs to invest hours, and money, waiting in queues when they should otherwise engage in more productive activities. So it is not practical to join the bank daily.

Among the reasons why the crunch is worsening is the open secret that most of the bond notes are largely in the currency traders’ hands in the capitals, but mostly at the country’s borders where a lucrative currency trade is underway.

Just like in 2008, stacks of money are found in the streets with parallel market traders and not as much in the banking system.

I spoke to a few people in formal business, informal enterprises and ordinary government and private sector employees to get an idea of how these currency developments are affecting them. But before I discuss my findings, let me give a brief breakdown of what is currently prevailing in the parallel money market in Zimbabwe.

To purchase US dollars of small denominations using bond cash notes, the premium exchange rate now begins around 6 percent but for bigger denominations such as the US$50 and US$100 which are mostly used by traders going out of the country to purchase imports and which are preferred abroad, the premium is as high as 10 percent depending on quantity.

So, in the event that one’s money is stuck in a bank account and they need to get cash to travel and purchase goods outside of Zimbabwe, their options are limited to transferring their money to a dealer for cash any premium between 22 and 40 percent.

Once one purchases this cash, if they want to further exchange for South African rands, it is cheaper to buy US dollars first and then purchase SArRands as a direct cross-rate because doing so with bond cash is slightly more expensive.

Ironically, where the banks no longer issue foreign exchange, some street dealers have been known to have sealed and serialised US dollars which they trade on the streets, begging the question where these crisp new notes are coming from.

But even with some of this foreign exchange available on the market, the word is that foreign currency is increasingly scarce. But instead of calling for a witch hunt, I will suggest that this is indicative of an even bigger structural problem in the economy which cannot be fixed by accusations; instead, I suggest more fundamental solutions that can address these bigger structural challenges.

The impact of these price and currency dynamics is there for all to see. According to the people I have spoken with, prices of commodities are going up, showing signs that inflation is no longer just creeping, but in fact beginning to gallop.

Retailers who have to manage these exchange rates are fully aware that they are not prioritised by the Reserve Bank in foreign exchange allocations so they have to utilise the parallel market if their businesses are to survive.

For this reason, they have to factor in all the escalating currency prices for all their imports, many of which are brought into the country illegally because of the restrictions of SI 64, although this has since been relaxed.

Take for instance, pharmaceuticals. Most supplies are imported from places such as South Africa and while some have priority and use official rates others do not.

Pharmacies have to manage the different cross rates before bringing in imports, pushing up prices of some of their stock by over forty percent.

My confidantes in business all confirmed that they needed to incorporate all these currency complexities to purchase their products, not locally available in the country.

But if businesses are suffering, imagine the impact this has on employees and pensioners who receive their payments through bank deposits. In short, their money income is subject to a parallel market hidden tax of forty percent if they are buying non-priority imports, meaning their earnings are immediately slashed by this premium, whether they want to retrieve cash or make purchases of non-priority imports.

If they want to withdraw cash, they have to sacrifice hours, even days away from work and their other economic activities in order to get the inadequate US$ 100 per week, and in most cases, far less than that.

This is the grim reality in Zimbabwe; the developments in the parallel money market have a very terrible effect on honest hard working employees and the most vulnerable in our society, the pensioners.

Never mind the lifetime of service pensioners gave to Zimbabwe, their pensions are depressingly inadequate. Some of their funds are managed by the most inept of institutions, the National Social Security Authority (NSSA).

Most of their members get a maximum of US$60 per month, so you can imagine the impact of the three tier pricing system; they can’t even burn the money because they will be left with almost nothing!

The precedent has been that the government has placed the responsibility for resolving these problems to the Reserve Bank of Zimbabwe.

But, currency instability is not the main problem in itself as much as it is just a symptom of a bigger structural issue. Government must avoid populist, quick fix solutions such ill-conceived price controls of the kind imposed in 2007 which all but shocked the economy into cardiac arrest.

This is where government must come in, with all its coordinating potential to establish an inquiry into the main challenges and possible solutions to the problems.

As I see it, among the main solution is addressing the productive side of the economy, but the process of doing so requires wide, but strategic consultation, policing and implementation.

More specific solutions are available from academics and leading industry, commercial and labour bodies who could inform the relevant commission.

Only a committed consultative process can begin to identify the major challenges and ways of addressing them, and could seriously be helped by other political solutions beyond the purview of this article..

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