In response to a severe liquidity crisis, the Governor of the Reserve Bank of Zimbabwe (RBZ) John Mangudya on 4 May announced that new ‘bond notes’ would be printed and entered into circulation through an export incentive of 5% of export proceeds. The notes will be pegged on a 1:1 basis with the US dollar.

In addition, Mangudya set a USD 1,000 limit on bank and automated teller machine (ATM – cash machine) withdrawals, reduced the amount of cash allowed to be taken out of the country from USD 5,000 to USD 1,000, and stated that measures to encourage the use of alternative currencies would be introduced as of 5 May. These will require 40% of all US dollar foreign exchange receipts from exports to be converted by the RBZ into rands and 10% into euros.

Treating the symptoms, not the cause

The impact of the central bank’s measures is likely to be limited. Although Zimbabwe officially has nine legal currencies, the US dollar accounts for an estimated 90% of transactions. This over-reliance has severely constrained the existing dollar supply, while also making it difficult for the government to effectively address deflation caused in part by the strengthening of the US dollar against the currencies of Zimbabwe’s regional trading partners. Increased use of the rand should ease these challenges. However, illiquidity has also been driven by a current account deficit of around USD 3bn per year; falling investor confidence, which has reduced investment inflows and prompted widespread externalisation of capital; and a decline in domestic industrial capacity. These challenges are unlikely to be addressed under the current government.

Further capital controls are likely to be imposed

The government is unlikely to restore the confidence required to stimulate increased investment. Its efforts to do so will continue to be undermined by populist rhetoric and factional battles as the ruling Zimbabwe African National Union – Patriotic Front (ZANU-PF) struggles to address succession issues and external challenges. Efforts to address economic challenges through orthodox fiscal policies and promotion of export-orientated industries are therefore likely to be ineffective. The government will instead rely heavily on the central bank’s use of monetary policies such as tighter restrictions on foreign exchange transactions.

Despite stated concerns from industry and media, the introduction of the ‘bond notes’ does not herald the return of the Zimbabwean dollar and the volatility that would accompany such a move. Mangudya has explicitly laid out the limits of the notes and they are backed by a USD 200m African Export-Import Bank facility. Meanwhile, very few figures at the top level of government appear to have much appetite for a return to the Zimbabwean dollar. Not only would such a move damage their own commercial interests, it would also derail the government’s current attempts to re-engage with the IMF and other sources of potential credit, and prompt widespread discontent at a time when ZANU-PF is worried about growing external challenges to its political dominance.

Ignoring retail regulations

As well as attempting to encourage the use of a greater range of currencies and introducing the new ‘bond notes’, Mangudya also stated that ‘all retailers, wholesalers, businesses, local authorities, utilities, schools, universities, colleges, service stations, [and] informal sector among others are with immediate effect required to install and make use of the requisite POS [point of sale] machines, so as to reduce the demand for cash in the economy’.

However, such efforts to reduce the use of cash are likely to be of limited effectiveness. The government lacks the capacity to ensure compliance with such requirements, particularly in the informal sector, which comprises roughly 50% of Zimbabwe’s economy. In addition, the use of formal banking services such as debit and credit cards is extremely low, meaning that the majority of the population will continue to rely on cash.

Potential concerns

Mangudya stated that the new ‘bond notes’ will be introduced in the next two months. However, extensive criticism of the move has already forced him to try to alleviate concerns in a press conference on 6 May and may yet force the RBZ to withdraw the proposal. A number of commentators, including former minister of finance Tendai Biti, have stated that Mangudya’s proposals are unconstitutional and should be challenged in the courts. A larger concern is that a population wary of anything perceived as a return to the sovereign currency and hyperinflation of the 2000s will simply refuse to accept the ‘bond notes’ as hard currency.

A worsening outlook?

Although some of Mangudya’s measures may temporarily alleviate the continuing liquidity crisis – helped by foreign exchange inflows from the recent start of the tobacco selling season – they are likely to worsen the two-year outlook. The limited scope of the new ‘bond notes’ means they are unlikely to have a significant impact, while measures such as the mandated conversion of 40% of export receipts into the currently volatile rand will deter investors for whom the use of the stable US dollar was one of Zimbabwe’s few selling points. This will hinder the recovery of the export sector, without which Zimbabwe will have to continue to rely on capital controls in an attempt to ease illiquidity and tackle deflation.

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