Government should reassess the bond note project which has created loss of confidence in the economy, in particular the financial sector, and instead negotiate for the $200 million African-Export-Import Bank to be used to increase liquidity in the South African rand to the economy.
According to a compendium of key policy research released to mark the end of the five year long USAID Strategic Economic Research and Analysis programme, a monetary regime was needed to restore competitiveness in Zimbabwe and provide sufficient liquidity in the economy, and the closest to achieving these objectives was the use of the Rand.
“Using the rand would enable the economy to ride on the competitiveness of South Africa. The rand would inject liquidity in the economy because most of Zimbabwe’s external trade is conducted with South Africa,” read the study.
“Rand currency circulation would be a two- way flow unlike the dollar, which has multiple flows. In addition, South African banks operating in Zimbabwe could be called upon to provide rand liquidity.”
Recently, the Reserve Bank of Zimbabwe governor Dr John Mangudya said bond notes would still be introduced at the end of October as they would be an export incentive which would get the economy back on track. He is expect to further support this measure when he presents the mid term monetary policy on Thursday.
The policy research conducted by USAID-SERA, Confederation of Zimbabwe Industries and National Economic Consultative Forum, highlighted that the change of the currency alone was not going to solve the initial position of the current cash shortage.
“Because Zimbabwe’s foreign reserves and hard cash balances, including nostro accounts, have been severely depleted, randisation would require external borrowing to inject rand liquidity.” According to data from the Reserve Bank of Zimbabwe the estimated amount required to restore hard cash imbalances to 20 percent of total system deposits is around $590 million. “The Afreximbank facility of $200 million originally meant for bond notes can be used for this purpose. Government could also run down its stock of foreign reserves estimated at about $350 million.”
Further to that, the study says the RBZ should progressively reverse its policy that has cut off foreign inflows and remittances (including export proceeds) from being retained in bank’s nostro accounts so as to instill confidence in the banking system.
The study also calls on RBZ to put the mining sector on top of the priority list in the allocation of foreign currency. “Mining companies should not line up for foreign currency to order supplies as this is akin to killing the goose that lays the golden eggs. Allowing the mining sector to access foreign currency on demand will restore confidence and expedite the generation of foreign receipts.”
Other recommendations improving trade competitiveness, promoting tourism, removing impediments to FDI including the repealing of the Indigenisation Act and restoring confidence in the banking system so that money flows through system.
For the past five years, SERA has supported many of Zimbabwe’s key economic institutions, key among its milestones being pioneering the research leading to the current government-wide Doing Business reform work as well as thematic research in pensions, cost drivers, mining and public sector wages.