Zimbabwe bond notes have helped but won’t address underlying issues :World Bank

Google+ Pinterest LinkedIn Tumblr +

Harare – Zimbabwe’s bond notes – which trade at par with the US dollar – have managed to ease liquidity shortages but will be unable to address the country’s macroeconomic imbalances, while further issuance of the currency will inflame inflationary pressures.

FILE PHOTO: A currency dealer counts wads of bond notes outside a bank in Harare, Zimbabwe,February 24, 2017. REUTERS/Philimon Bulawayo/File Photo

This is the view of the World Bank, which said on Wednesday that government debt to the banking sector has increased since 2015. This has now been partly blamed for the protracted financial crisis that has limited credit to the economy.

Zimbabwe, a close trade partner of South Africa, introduced bond notes in November last year to arrest growing shortages of foreign currency notes used as legal tender in the country.

Data released by the Reserve Bank of Zimbabwe this week shows that the government has now introduced as much as $160m in bond notes. Experts have cautioned against the continued issuance of the bond notes, which according to the Zimbabwean central bank will be issued relative to the country’s export earnings.

But the World Bank has now said that further printing of the Zimbabwean currency – which the government says is backed by a $200m facility from Afreximbank – will inflame inflation.

“New bond notes introduced in November 2016 have eased liquidity shortages but are unable to address the underlying macroeconomic imbalances. The bond notes have increased the cash supply, boosting liquidity and attenuating deflationary pressures,” the World Bank said in its economic report on Zimbabwe released on Wednesday.

It however says that “further issues of bond notes will need to be carefully monitored to contain inflationary pressures” at a time when Zimbabwe’s inflation has been creeping up.

The World Bank also said that Zimbabwe’s government has notched up an overdraft of about $1bn with the RBZ. With revenue flows expected to be subdued this year, there are concerns that the overdraft may worsen further.

However, according to the World Bank, “adding to the overdraft to finance the 2017 budget will increase the money supply and intensify” inflationary pressures. If untamed, inflation will likely limit Zimbabwe’s economic growth, which the IMF projects at 2.8% this year.

“Going forward, inflationary pressures and tighter controls are projected to limit growth. Although structural reforms, including improvements in the business climate, remain vital to Zimbabwe’s economic development, in the short run they are not likely to fully offset the cost of foreign exchange rationing.”

The World Bank said Zimbabwe’s banking sector has sustained the government’s financing needs but added that this has resulted in “liquidity shortages” in the economy.

Meanwhile, a combination of tight credit conditions, the inability of Zimbabwean banks to honour international payments and import restrictions caused imports to contract by about 14% in 2016. Exports rose by about 2.4% and the current account deficit contracted by 6 percentage points to 4.1% of gross domestic product in 2016.-Fin24