<strong>HARARE -</strong> The leader of Zimbabwe main opposition party, Nelson Chamisa, alighted from his car, grabbed a microphone and made a bold promise to scrap bond notes if he wins the July 30 presidential election to stem the worsening cash shortages and liquidity crunch.</p>
The intensifying cash shortages have been a major issue on the campaign trail in the first vote since Robert Mugabe’s downfall in November after 37 years in power, with new President Emmerson Mnangagwa, and his chief opponent, Chamisa, making lavish promises to address the liquidity crisis.
Mnangagwa has promised “improved access to cash” when he wins the presidential election, with his rivals and critics asking why he does not just address the cash shortages now.
The 75-year-old former security chief known as Ngwena or “The Crocodile” — who ascended the throne through a soft coup — has said he has injected millions of United States dollars into the market to ease the problem, but the cash is being “sponged” out.
He has promised to come up with new “creative ways of comprehensively tackling this problem, both in the short to medium term.” He is, in the meantime, promoting non-cash payments through increased usage of “plastic money” in a country long dominated by cash.
But the vast majority require cash and are reluctant to switch to plastic money. They say payment by plastic causes problems partly due to the unavailability of merchants with swipe machines for small transactions and also in the rural hinterland where cash is the major medium of exchange.
Chamisa, a 40-year-old charismatic lawyer and pastor, on the other hand, has vowed to roll back the bond note policy by scrapping the fiat currency and joining the Common Monetary Area led by South Africa if he wins to end cash shortages that have seen banks limit withdrawals to as little as $20 bond coins.
Chamisa did not explain to the crowd how he would unfurl the plan to demonitse the bond notes. But this did not appear to matter to the hundreds who had waited for his rally on Friday at Mapani Business Centre in Sanyati, a farming hamlet in one of Zimbabwe’s poorest regions. They ululated, whistled and roared their approval singing “Chamisa mai mwana.”
The MDC Alliance presidential candidate said the “bond notes” have been debased and now have a street value of as little as 70 percent of their face value.
Chamisa — backed by several smaller parties — said his government would quickly abolish the quasi-currency on August 1, and would be the first ordinance he would sign as president.
Promising new initiatives is a favourite tactic of politicians the world over and, to head off the scepticism such pledges often face, Chamisa insisted his “masterstroke” plan would decisively stem the dollar shortage and end the chronic economic crisis.
Monetary policy debate matters in elections in Zimbabwe, which replaced its own currency mainly with the US dollar in 2009 after inflation, hit as much as 500 billion percent annually in late 2008.
After rebounding from one of the most spectacular episodes of hyperinflation in human history, Zimbabwe is mired in fresh economic turmoil with a “bond note” currency meant to stave off a shortage of dollars failing dismally.
Chamisa, bidding for power for the first time having taken over the reins after death of MDC founding leader Morgan Tsvangirai from cancer in February, faces an uphill battle against Mnangagwa, who has the power of incumbency, access to State coffers and a well oiled campaign bankrolled by key ally China, while the opposition is struggling for funding.
Chamisa’s MDC party, however, won the 2008 elections, during which time he served as ICT minister.
It was difficult to assess whether his plan to demonetise “bond notes” blamed for adding to distortions in an economy struggling to recover from years of economic mismanagement and his rally as a whole won new converts in Sanyati, though it enthused supporters.
His stump speech that bond notes had created big problems by essentially creating a bank run on dollar notes earned loud guffaws.
Zimbabwean financial research firm Equity Axis said while the bond note has been significantly unpopular and weak, it had both downside and upside, and likewise, it has been a matter of weighing the payoffs.
“Although the assertion of immediately scrapping off the bond note would prove popular among the common folk, who believe it has been chasing away the real dollars, the reality is far from it,” Equity Axis said in a commentary.
“The ratio of bond note to total money in the system is significantly low and the real drivers of inflation and exchange rate weakness have something to do with RTGS and this has mainly been pushed by government borrowings.
“But of course the man on the street relate to what they know and what they see and to them bond note is the causative. Still the problem is not whether the bond should stay or not, it is the how part.
“It has to be done in a calculated manner which does not result in further loss of value as before. Ring fencing of deposits is not easy and the matter has to be gradually settled,” the research firm said.
Veteran consultant economist John Robertson said he completely agrees with Chamisa that the bond notes should be scrapped.
“At the first opportunity, all of them should be bought with US dollars and destroyed. Gresham’s Law, which states that bad money will drive good money out of circulation, is as powerful as the Law of Gravity and government was wrong to believe they could defy it,” Robertson told the Daily News on Sunday.
“However, the government’s determination to spend far more than it can raise in tax has been much more damaging than the hundreds of millions of bond notes issued.
“Government’s excess spending has been in the thousands of millions. Some of it was real money drawn from long-term deposits and pension fund, but some of it was funded by overdrafts with the Reserve Bank of Zimbabwe.
“The overdraft money was not real money, it was just numbers on computer screens, but when government spent it, some of the spending was on imported goods. That meant that real money had to leave the country to pay for the imports.”
The International Monetary Fund (IMF) has warned that Zimbabwe’s cash shortages is worsening and may trigger inflation if government does not temper excessive State spending.
Government has relied on taxes and the domestic market for borrowing, sending the budget deficit spiralling.
Robertson said Zimbabwe’s already very scarce foreign currency reserves, which were not enough to meet current outflows to start with, have come under increasing pressure as government caused money supply to grow about a hundred times faster than the economy is growing.
“That is the cause of the falling value of the bank balances that people want to convert into real money that can pay for imports. So, destroying the bond notes will not be enough to solve the problem,” he said.
“Government must promote economic growth to rebuild its tax base and the growth must be made possible by inflows of capital in the hands of investors.
“Before investors will bring the billions of dollars of capital needed, they will have to find good reasons to be confident about the security of their investments. This security was severely damaged by government’s decision that it had the power to confiscate business assets.
“Farmland was confiscated, title to mining claims were confiscated, company shares were confiscated and now foreign earnings are being confiscated. Compensation for the farmland, mining claims and company shares never materialised and the payment for today’s foreign earnings is with money that cannot be used to pay for imports, or to pay dividends to external shareholders.
“With these handicaps, foreign investors are still being severely discouraged. True, they won’t have to part with shares if they want to start new manufacturing companies, but most of these companies will not be started until well-funded farmers are back on the land and supplying good volumes of high quality agricultural inputs. “
Robertson said everyone sees enormous potential, but every investor knows that the barriers in their way have been put there by deliberate government policy decisions.
Mnangagwa told foreign investors at a recent rally that his ruling Zanu PF party would win re-election in the July elections and dismissed the political opposition as “zvipopi zvinovukura” or “barking puppies”.
Mnangagawa told thousands of party supporters in Chegutu that his government was handling many investment requests from Europe, Asia and Arab countries
But Robertson said at present, the country has one of the worst investment environments in the world and it actively discourages investors by threatening their security and smothering their efforts with dozens of costly licence and permit requirements.
“After the election, the new government must immediately transform the policy structures to make investors feel safe and welcome,” the leading Harare-based economist said.
Jee-A van der Linde, an economist with NKC African Economics, told the Daily News on Sunday that there is a lot of interest in these upcoming elections, and any noteworthy policy reforms will certainly grab attention.
Linde said Zimbabwe’s economic idiosyncrasies create a great deal of uncertainty, and it will require some “creative thinking” to find viable solutions for some of its problems — especially the currency situation.
“The whole idea behind the bond notes was to avoid panic in the first place by preventing capital flight, expatriation and hoarding of US dollars. At the moment, Zimbabwe’s financial system faces considerable lack of confidence.
“So, to answer your question, ‘an immediate scrapping of bond notes’ would more than likely cause a sizeable shock to the system. It might be more effective to phase out the bond notes in a gradual manner,” Linde said.
“Realistically speaking, at the moment Zimbabwe probably does not have the economic fundamentals in place to adopt such a serious policy reform in a very short time frame.
“In order to address Zimbabwe’s currency situation, the authorities would firstly need to restore confidence to the country’s financial system by curbing excessive spending that is unnecessary money flowing to civil servants and ailing state-owned enterprises. Moreover, the government should instil financial discipline that could filter throughout the rest of the economy.”