Bond notes – A look at the big­ger pic­ture

Chronicle (Zimbabwe) - - Business - Anal­y­sis

THE cor­ner­stone of eco­nomic de­vel­op­ment of any coun­try is pro­duc­tion of goods and ser­vices. In Zim­babwe the prob­lem is that the do­mes­tic in­dus­try is not pro­duc­ing enough to meet lo­cal de­mand and ef­fec­tively ex­port. Many lo­cal in­dus­tries gen­er­ally lack the nec­es­sary so­phis­ti­ca­tion to com­pete with their high-tech coun­ter­parts in the global econ­omy.

The per­sis­tent dilemma of cheap im­ports and the re­sul­tant trade deficit, re­duced rev­enue col­lec­tion, loss of jobs and the for­eign ex­change short­ages, are some of the symp­toms of a weak pro­duc­tion base in the econ­omy.

It fol­lows, there­fore, that Zim­babwe needs to come up with a strat­egy to stim­u­late ex­port pro­duc­tion and in­crease for­eign ex­change earn­ings. This is also cru­cial for pur­poses of liq­ue­fy­ing the use the mul­ti­ple­cur­rency sys­tem, which is de­pen­dent on the econ­omy’s ca­pac­ity to gen­er­ate suf­fi­cient for­eign ex­change to meet its re­quire­ments.

To achieve this, the Gov­ern­ment as an en­abler, has the man­date to come up with a pack­age of in­cen­tives to cush­ion the pro­duc­tive sec­tors and nur­ture growth. The pri­vate sec­tor as such needs to work closely with the Gov­ern­ment in cre­at­ing favourable pol­icy space for in­vest­ment and iden­ti­fy­ing ar­eas for in­cen­tivis­ing pro­duc­tion.

Con­fi­dence build­ing is a key fac­tor in this re­gard hence the pub­lic also needs to be in­formed to sup­port such ini­tia­tives.The com­ing in of bond notes, an ex­port bonus scheme in­tro­duced by the cen­tral bank to boost do­mes­tic pro­duc­tion, should be ap­pre­ci­ated from this broader con­text.

The new notes are ex­pected to be in cir­cu­la­tion in a few weeks’ time with the Re­serve Bank of Zim­babwe (RBZ) rolling out mas­sive aware­ness cam­paigns ahead of their us­age.

The Gov­ern­ment has al­ready pro­mul­gated the nec­es­sary leg­is­la­tion back­ing the im­ple­men­ta­tion of the strat­egy. In­deed much ef­fort has been de­voted to high­light­ing rea­sons be­hind neg­a­tive growth and the wide­spread pub­lic pes­simism and spec­u­la­tion about bond notes.

Of­fi­cial data from the RBZ shows for­eign ex­change that is be­ing used by ev­ery­one in the coun­try is de­rived from ex­ports, di­as­pora re­mit­tances, for­eign in­vest­ments, loans and grants. Sixty per­cent (around $3,6 bil­lion) of for­eign ex­change is from ex­ports alone. Zim­babwe’s ma­jor ex­ports in­clude to­bacco, gold, plat­inum, di­a­monds and fer­rochrome, which ac­count for around 80 per­cent ($2,6 bil­lion) of the coun­try’s to­tal ex­port re­ceipts. Over 40 per­cent of the coun­try’s ex­ports are des­tined to South Africa, a sub-re­gional power house, which is also a source of close to 60 per­cent im­ports.

While the coun­try’s ex­ports have grown up from an average $1.7 bil­lion dur­ing the 1990-2009 pe­riod to $3.6 bil­lion dur­ing 2010-2015, the cur­rent low level of pro­duc­tion is not able to sat­isfy lo­cal de­mand, ex­perts say.

Also in view of the widen­ing trade deficit at around $2.5 bil­lion, au­thor­i­ties need to craft sub­stan­tial pol­icy mea­sures to pro­mote ex­ports and en­hance com­pet­i­tive­ness. The sig­nif­i­cance of mea­sures such as the bond notes strat­egy should, there­fore, take cen­tre stage espe­cially con­sid­er­ing the strength­en­ing of the US dol­lar against re­gional cur­ren­cies, weak­en­ing global com­mod­ity prices and tight­en­ing of global fi­nan­cial con­di­tions.

The cen­tral bank has em­pha­sised the need to bring san­ity in the man­age­ment of for­eign ex­change in or­der to pro­mote lo­cal pro­duc­tion and re­duce im­port de­pen­dence to avert fur­ther eco­nomic ruin.

It is against this back­ground that the Gov­ern­ment is in­tro­duc­ing the bond notes, as a per­for­mance re­lated ex­port in­cen­tive or bonus scheme to be awarded to ex­porters of goods and ser­vices.

Un­der this scheme the cen­tral bank would pay up to five per­cent in­cen­tive or bonus in bond notes to ex­porters of goods and ser­vices.

“You will earn up to five per­cent through ex­port­ing goods and ser­vices or when you re­ceive money from the di­as­pora.

The ex­port in­cen­tive will be paid in bond notes, which have the same value as the US dol­lar (1:1) and are de­posited into and with­drawn from your ex­ist­ing US dol­lar bank ac­count,” says RBZ.

The strat­egy is also meant to com­ple­ment mea­sures by the apex bank to deal with ex­ter­nal­i­sa­tion and in­ef­fi­cient dis­tri­bu­tion and util­i­sa­tion of for­eign ex­change in the econ­omy. The act of re­ward­ing ev­ery con­tri­bu­tion in for­eign cur­rency gen­er­a­tion is in it­self a noble ges­ture that demon­strates the Gov­ern­ment’s com­mit­ment to trans­form­ing the econ­omy. It is un­for­tu­nate that this big­ger long-term pro­duc­tion side of pol­icy is be­ing over­looked by many and ac­tu­ally sac­ri­ficed at the al­tar of diver­gent opin­ion and spec­u­la­tion.

Re­serve Bank of Zim­babwe Gov­er­nor Dr John Man­gudya

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