BOND notes continue to vanish from the formal market, with latest statistics indicating that only seven percent of the unique currency’s issued value was in circulation at the close of 2017.
According to Equity Axis (Equity) — a local financial research firm Equity, of the $345 million bond notes issued by the Reserve Bank of Zimbabwe (RBZ) then, only $24 million was in circulation as at December 31 2017, with the rest in the parallel market.
This comes as the amount of $5 denominated bond notes has significantly reduced in the formal system, while the $2 notes are also increasingly getting scarce, with banks mostly disbursing coins in rations.
“Of the total issued bond notes and coins by the RBZ ($345 million) only seven percent is in effective circulation, rest is under pillows,” Equity said on Twitter.
“In essence, Zimbabweans no longer deposit money,” it said, adding that “from an effective circulation rate of 35 percent in 2016 to seven percent at end of 2017, the decline supports the notion”.
The dip, which relates to the flourishing parallel market, points to a cash crisis which has seen the banking sector record deposits higher than actual cash, Equity said.
“Unpacking the cash crisis in Zimbabwe, hard cash plunging deep as deposits grow. Government open market borrowing driving deposits growth effectively driving money from circulation on speculative grounds as well as deterring nostro conversion to local banking system,” the research firm said.
According to Equity’s data, commercial banks only held three percent of bond notes and coins issued by the central bank as at December 31, 2017.
“When first issued, bonds closed 2016 at $86,7 million rising by 300 percent to $345 million as at December 2017 as RBZ increased the facility,” it said.
“Despite this increase in issuance, arbitrage has driven the bonds out!” Equity said.
This comes amid growing demands from businesses for Zimbabwe to adopt a local currency after this month’s impending polls to arrest the deepening liquidity crisis.
“We propose three options… to convert all RTGS dollars into new local currency, which is pegged 1:1 with the US dollar, and thereafter float it,” the Confederation of Zimbabwe Industries said in a paper titled ‘Post-Election Recovery Document: Macro and Currency Draft’
Just last month, Zimbabwe National Chamber of Commerce chief executive Chris Mugaga told members that the bond notes had continued “disappearing” from the market and called on government to craft a solution immediately.
Other economic quarters have called for fiscal devaluation measures so that Real Time Gross Settlement (RTGS) balances can match parallel market rates.S
Fiscal devaluation is the use of the tax system to mimic a nominal devaluation of the exchange rate, in particular by increasing taxes on imports and reducing them on exports, thereby changing the relative price of domestic and foreign goods.
Tony Hawkins, a renowned economics professor, is on record saying the only way for Zimbabwe to be competitive would be to devalue RTGS balances by at least 30 percent to match parallel market rates.