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"2 Keys" - GCR/RV Short Intel Update - Saturday - July 22, 2017

Received via email at 5:57 PM EDT for publication. ~ Dinar Chronicles There are 2 key events we believe will mark the beginning and end of...

Tuesday, July 11, 2017

Zimbabwe: Bond Notes a Bad Currency

Bond notes a bad currency

July 10, 2017

AS we warned right from the beginning when bond notes were introduced, Gresham’s Law would inevitably apply in the currency market and economy after that.

Zimbabwe Independent Comment

This refers to the principle in economics that “bad money drives out good money”. Good money has little difference between its nominal value and commodity value. Bad money has a commodity value considerably lower than its face value.

This is what is happening now — hard currency, the United States dollar, has been driven out by the dubious bond notes.

There is nothing as heart-breaking as seeing desperate Zimbabweans spending the night in a bank queue in this chilly weather.

The crisis has actually worsened. Long bank queues are now a permanent fixture, the parallel market for foreign exchange is gaining momentum, and it has become a nightmare for the transacting public to make simple payments.

Commercial banks have set the maximum withdrawal as low as US$20. Some banks have begun disallowing interpersonal transfers and are now telling clients that they must first wire the money into a company account before the amount can be transmitted to another personal account.

Bond notes, according to the central bank, were supposed to facilitate everyday transactions. The grotesque irony is that today bond notes are not only in short supply, but an unreliable medium of exchange. It is trite economics that bad money chases away good money. Evidence abounds that bond notes have not eased the cash shortages. For starters, the value of the bond note is not at par with that of the United States dollar, contrary to official assurances when the fiat currency was introduced last year. As a store of value, bond notes are a non-starter.

As everyone has seen, bond notes, far from solving the cash crunch, have actually facilitated the mopping up of US dollars, leaving the market high and dry. Today, you can get your hands on the US dollar, but at a huge premium.

Worryingly, there are reports that the central bank is now planning to increase the stock of bond notes in circulation by extending the US$200 million Afreximbank facility. The pan-African bank’s president Benedict Oramah has confirmed that the matter is under “increased discussion”.

Reserve Bank of Zimbabwe governor John Mangudya, no doubt hyping up the bond notes, compared the fiat currency to “a gold standard”. Considering the turmoil caused by the cash shortage, it is incredible that he would make such a statement.

What the authorities are stubbornly refusing to acknowledge is that bond notes are not a magic bullet. A sustainable solution is one that addresses the underlying economic fundamentals.

Macro-economic imbalances can only be corrected through a comprehensive package of policy interventions and reforms.

Printing more bond notes will only stoke the fires of inflation, while doing precious little to solve the structural challenges that continue to weaken the economy. What is needed is fiscal discipline, enhanced productivity, far-reaching reforms and political change.

Source: Zimbabwe Independent

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