Understanding the market for bond notes
THE emergence of the cross-border parallel market for bond notes is somewhat worrying.
Well, in some respect, it is a threat to the functionality of the multiple-currency regime in general, particularly the surrogate currency.
The extension of a parallel market for bond notes to neighbouring countries could be an indication of the allure of this new practice, which is occasioned by increased foreign currency shortages.
As enterprising citizens try to maximise on arbitrage opportunities that continue to be presented by foreign currency shortages, they have extended their operations to neighbouring countries, mainly South Africa, Zambia, Mozambique, Malawi and Botswana.
What makes such activities convenient is the sheer volume of trade between Zimbabwe and the countries in which such trade is flourishing.
The fact that Zimbabwe is a net importer on account of the relatively low economic activity in industry makes it a major cause for concern for bureaucrats who manage the country’s industry and commerce portfolio.
Equally, the Reserve Bank of Zimbabwe (RBZ) should be worried about these developments as they are a threat to the sustenance of the current monetary regime.
Due to the shortage of cash and nostro balances, bond notes and US dollar cash are trading at premiums of as high as 15 percent and 20 percent on the parallel market, respectively.
This has also created an opportunity for cash traders to make profit from trading these currencies on the grey market. The fact that bond notes are still pegged at par to the US dollar in the official market creates arbitrage opportunity for enterprising citizens.
This has contributed to the growing parallel market for currencies, which has extended into neighbouring countries as forex traders try to capture a wider market, especially those visiting or sending money back to Zimbabwe.
The proposition about ripe arbitrage opportunities in the region is supported by trade statistics which show that more than 50 percent of the country’s import bill in 2016 was from African countries, mainly South Africa. These statistics also demonstrate the importance of Zimbabwe as a market for its neighbouring countries.
As Zimbabwe has evolved as a highly consumptive nation, local traders have inevitably been driving economic activ- ities of many border towns such as Musina.
The South African government’s misgivings for Statutory Instrument 64 of 2016 are quite evident.
It can also be speculated that the emerging market for bond notes in neighbouring countries could reflect the increased preference for the greenback, especially in countries whose currencies are increasingly volatile.
Of note is the gyration of the South African rand as the Southern African country grapples with a heavy contestation for power with South African President Jacob Zuma nearing the end of his tenure.
This could be another driver for the emergence of the parallel market for bond notes.
It makes economic sense for visitors to Zimbabwe to carry bond notes for transactional convenience as they are readily acceptable for trade.
But the pattern in the market is clear - the US dollar and bond notes are now the most dominant in the basket of multiple currencies.
And this is worsening cash shortages. Though the market seems to be resisting, it is incumbent upon the central bank to promote the wider adoption and use of other currencies.
However, broadly, there is need to appreciate that the obtaining challenges are a sign of market failure and a challenging macro-economic environment.
The country’s challenges mainly lie in inherent structural weaknesses in the economy.
We presently have high levels of consumption, which translates into a high import bill as production levels have not sufficiently recovered well enough to meet local demand.
The following policy measures are recommended to address this economic imbalance and sort out the country’s cash crisis:
Reindustrialise the country through evolution of policies to attract and retain both local and foreign capital;
Reduce government expenditures through reduction of civil service allowances (World Bank reports that about 43 percent of wage bill is in allowances) and privatisation of parastatals;
Revitalise the economic enablers such as Ziscosteel that have the capacity to turnaround the country’s export capacity; and Decisively deal with corruption. Persistence Gwanyanya is the founder of Percycon Advisory. For feedback use: percygwa@ gmail.com or Whatsapp on +263 773 030 691.