“USD stocks continues to decline”

USD stocks are dwindling at what I would call “running out at Boltspeed”. It is observable that the worst is likely to continue worsening. In my view, the situation we are in is a testament to the validity of two theories:

1. Force of demand and supply- if the wider market prefers USD to bond notes, you can do nothing about it. Forces of demand and supply will always prevail over any monetary policy or fiscal policy stimulus.

2. Overtime, a stock’s value will rise or fall to match the intrinsic value of the underlying business- Benjamin Graham. The value of bond notes (our stock) will, overtime, fall to match the state of the underlying Zimbabwean economy.

In the recent past, an elderly lady of my mother’s age in my neighbourhood asked me an incredible question. She banks with POSB. Her question was if bond notes came to solve cash shortages why is it still difficult to access cash, joining a long queue at the bank to access cash? What was going to be my answer because as basic as that question was, an impromptu response would not suffice.

I think we don’t need to be too reliant on analytics to know that the USD stock is declining, instinct and human intel from the ground also informs us. We know it because we are living it. From a long-range view, one can conclude that the bond notes came largely to substitute USD coffers and not as a complement.

Coming back to the subject, the background of the USD shortage is that the bond notes, though pegged at 1:1 with the USD, are legal tender locally, they are not a fungible currency and therefore, they cannot be used to expunge foreign obligations or commitments. Yet Zimbabwe is an open economy, meaning at some point in time, an individual, institution or the government will have a foreign demand to settle leading to a disproportionate demand of the scarce USDs.

Having said that, my assertion is that the USD stock will further plummet based on the following:

1. Poor export base which is a primary source of foreign currency. Given excessive rainfall received in our arable areas this season coupled with poor pre-planting inputs stocking, it is likely that our cash crops harvest won’t be attractive. This has a direct impact on our export base. Though Dr Mangudya wisely went ahead and legalised buying of gold output from gold panners as a means of strengthening a sustainable export base, but closing the export gap might still be difficult;
2. Lack of foreign direct investments (FDIs) which is a much needed non-debt source of foreign currency;
3. A parallel market for USD will continue widening. Small scale traders with stocks not on the RBZ’s import payments priority list will be opting to buy the USD in black market at a premium. So larger volumes of bond notes will be traded for a relatively smaller USD sum. On the flipside, this is also inflationary. Traders may need to increase retail prices to close the additional cost resulting in bond note-induced inflation;
4. A presentiment of how a bond note dominated market works has already been felt so hording of the USD is unavoidable, especially by some elements of our society who run brisk businesses yet they don’t bank;
5. Excessive government spending on officials foreign trips; and
6. Unabatable domestic demand for foreign goods or services, mainly for daily needs to which we don’t have equal local substitutes. For example, importation of wines from South African.

From an extended view, Dr Mangudya lowered the lending interest rate to 12% per annum effective from 1 April 2017 as a means of making credit more accessible to productive sectors of the economy. The backdrop is that the cost of borrowing is an issue the economy has grappled with consistently since dollarisation. Borrowers believe banks are ripping them off through punitive interest rates and service charges whilst banking institutions insist that their charges reflect the cost of securing funding, freight charges to import the cash and cost of distributing it, among others.

So by the reduction of interest rates from an average of 18% to 12%, I see two possible implications.

Firstly, from banking institutions’ perspective, lending might become relatively unattractive. As a support to this view, Dr Mangudya, from the time he assumed office, has been using moral suasion to try bring down the cost of lending but he wasn’t receiving camaraderie among bank chiefs. I would insinuate that the chiefs viewed this reduction in interest rate as a direct erosion of their banks earnings unsustainably.

Secondly, from borrower’s perspective, borrowing will now be relatively less expensive. Coupled with this, banks are being called to devise the best way of applying their RTGS funds which are sitting with RBZ so to enhance national output and productivity of small and micro enterprises under the banner of financial inclusion.

A balance of close to $1 billion in RTGS form is disbursable. Since these funds are earning zero interest income to the banks at the moment, banks may be drawn to lend them at 12%, thereby indirectly calling for an increase in volume of cash in the circulation. Increase of volume in circulation is not in itself a problem but, in this context, it will be an issue if the flow’s majority are bond notes. Bad money will cannibalise good money.

Time failed me to touch on the multiplier effect of some of the above, the negative contribution of our porous border posts to this situation, impact of the civil servants bonuses which the government commited to payout, possible USD-hold by “government” in preparation of the coming 2018 elections and the tail end possibility that the US government, under President Trump, may call back their currency.

I wish we should never exhaust all possibilities and be left out to face the inevitable.

By Msinde Lovemore Matondo

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