US Dollar Notes Disappear in
Zimbabwe

ZIMBABWE’S fragile economic situation is
lurching towards fresh depths amid
indications that small United States dollar
denominations are disappearing from
circulation, thereby raising the possibility of
a change crisis, the Financial Gazette can
exclusively report.The development has
triggered speculation of a conspiracy to mop
up the small denomination US dollar notes to
pave way for the planned introduction of
bond notes of similar denominations by the
Reserve Bank of Zimbabwe (RBZ) at the end
of next month.Despite widespread resistance
against the proposed introduction of bond
notes, government is proceeding with the
introduction of the domestic currency which,
it insists, is a surrogate of the US dollar —
the major currency under Zimbabwe’s
multiple currency regime.
RBZ governor, John Mangudya , announced
this month that the central bank would
release bond notes in $2 and $5
denominations at the end of October before
eventually introducing higher value bond
notes in $10 and $20 denominations. These
would later be followed by $50 and $100 bond
notes.The bond notes would rank pari pasu
with the greenback, he said.Apparently, it is
the US$2 and US$5 notes whose equivalent
bonds notes denominations the central bank
plans to unveil next month that are
disappearing from circulation.Denford
Mutashu, president of the Confederation of
Zimbabwe Retailers, said the level of cash
handled by retailers had generally gone
down.
“The usage of smaller denominations as
change in the retail industry is now also an
issue. We are trying to investigate why their
levels have declined,” he said.Mutashu said
they had observed that people were “avoiding
banking cash because the many times they
have to withdraw it is costing them in terms
of bank charges”.“Even other electronic
payment platforms are now discouraging
people from bringing cash into the formal
system because they are failing to give
people cash on demand,” Mutashu said.No
comment could be immediately obtained from
the RBZ and the Bankers’ Association of
Zimbabwe by the time of going to print.While
the bond notes were initially said to be part
of a US$200 million incentive for exports, the
RBZ has now indicated that the bond notes
would now be widely available, with
suggestions that these may be printed to
support Treasury which is battling to pay
salaries.
Critics and the public fear this will inevitably
mark the return of the dreaded Zimbabwe
dollar, which was abandoned after the
country lurched into an uncontrollable
hyperinflationary crisis that battered the
value of the domestic currency.The local
currency’s final days in circulation were
marked by anarchy after being hammered by
hyperinflation that reached a record 500
billion percent in 2008, wiping out life-
savings and impoverishing an entire
population.
The US$2 and US$5 notes whose equivalent
bonds notes denominations the central bank
plans to unveil next month that are
disappearing from circulation.Although
Zimbabwe has experienced a shortage of bank
notes that had been largely blamed on
externalisation of high value physical notes,
it has turned out much of the cash now in
circulation within the banking sector had no
backing of real US dollar currency, as it was
being generated by government through the
real time gross settlement system (RTGS) and
Treasury Bills. Therefore, no physical notes
could be imported to back this phony cash,
which only existed on the virtual banking
platforms.This then triggered the shortage
of notes, which resulted in tight withdrawal
limits and long queues at banks as depositors
sought to withdraw their money.The
dwindling of smaller US dollar notes
denominations, does not suggest
externalisation, but a possibility that a third
force may be mopping them out of circulation
to abet the planned introduction of bond
notes.
The possibility of externalising US$2 and US
$5 notes is remote, considering that most of
these small denomination notes have been
circulating while torn, damaged, badly soiled
and dirty.Analysts said they suspected that
authorities may be planning to leave very
little options for people who would be forced
to either accept the bond notes or resort to
the electronic payment system through
current cash shortages.They said even the
shortage of high value US dollar bank notes
was meant to leave people with very limited
options.Economist, Trust Chikohora, said the
country was headed for a major crisis and
the disappearing US dollar bills were
indicative of a system failure.“I cannot
comment more on the disappearance of some
ranges of notes, but I think it is linked to
the problem we now have with the RTGS
where we just have balances in our accounts,
but there is no real cash to back the
balances,” Chikohora said.Chikohora also
noted that the country’s cash crisis was so
deep that the outlook was bleaker.
“Foreign currency is used as a reserve
currency, which caters for external
payments. In our case we do not have a local
currency and we have no reserves. We are
living from hand to mouth. If externalisation
of the foreign currency continues, we will be
unable to service our imports. This has
already started happening. Yes, we are
running out of currency and we will end up in
crisis, in the absence of balance of payment
support,” he said.Buy Zimbabwe Trust chief
economist, Kipson Gundani, said while
speculation was largely driving events in the
economy, the situation in the country had
reached levels that it had become difficult to
trust authorities.“When a significant policy
is announced, people always contemplate the
outcomes and try to take the safe option.
Some may want to say that the RBZ is
sitting on the money, but I doubt if this is
the case.
In the past few months the RBZ has actually
been importing smaller denomination notes to
discourage externalisation, so we expect this
range of notes to actually be more in the
system. But we cannot trust authorities, no
matter how sincere they look.”There are
fears that the current situation could
trigger unprecedented volatility in the
banking sector, frustrating efforts to
stabilise the economy.IH Securities said the
stock of hard cash in banks plummeted since
January last year.“Hard cash in the banking
system has fallen from US$260,4 million in
January 2015, (accounting for 5,8 percent of
deposits) to US$118,2 million in May 2016
(being 2,0 percent of deposits); this clearly
poses risk given that hard cash should
constitute about four percent of total
deposits at any given time prudentially,” IH
Securities said in its report entitled: Banking
Sector, Surviving in a Cashless Economy.
“The country needs roughly US$200 million
circulating within the system at any given
time to maintain adequate liquidity, but this
threshold has proven difficult to achieve
given the phenomena of mass externalisation
as confidence in the system falls. The sector
was severely affected by a squeeze on
liquidity, which has now metamorphosised
into hard cash shortages, driven by…a
culture of externalisation,” the report
added.Mangudya has battled to calm market
fears that a decision to inject bond notes
into the economy, ostensibly to fund a five
percent incentive for exports, was not an
attempt to reintroduce the Zimbabwe
dollar.The domestic unit was dumped in 2009
to pave way for a multi-currency system
that had generally stabilised the markets
until detrimental cash shortages returned
last year.Public despondency over the bond
notes has swelled, amid reports that millions
of dollars were being wired out of the system
by panicky consumers, unnerved by a fresh
wave of losses should the central bank bring
bond notes.A staggering US$250 million was
siphoned out of the markets by jittery
depositors between May and early September
this year, according to Mangudya in his
defence for the bond notes.
There has been widespread resistance
against the proposed introduction of bond
notesHe said banks were importing about US
$15 million per month to meet the huge
demand for cash, also suspected to have been
caused by foreigners coming into the country
to cut back stage deals to gain access to
hard currencies.“Between May and September
we imported US$250 million,” Mangudya said
when he presented the Mid-Term Monetary
Policy Statement three weeks ago.“It is not
in banks, we are not seeing it.
The funding mechanism of the export
incentive scheme will be through bond notes
in order to preserve the offshore US$200
million countercyclical facility that has been
arranged to support the export bonus scheme
from externalisation or capital,” he added.A
spike in parallel market activities witnessed
in currencies recently has aggravated the
crisis, which has been highlighted by long
queues in banking halls, failure by banks to
honour withdrawals, and failure to fund
offshore commitments on time.Government,
which has struggled to find a lasting solution
to the deteriorating liquidity crisis, has a
huge task ahead.Two of the fortresses that
have defended the economy – tobacco and
gold exports — have failed to improve the
liquidity situation.
“We foresee initial resistance to the bond
notes on introduction, but believe that to
promote confidence there will have to be a
strong mechanism that allows both corporates
and individuals to easily redeem these notes
into hard currency when necessary,” said IH
Securities said.Old Mutual Securities
(OMSEC) warned that the nation should brace
for a deeper cash crisis.“Given a persistent
negative current account balance, the
liquidity situation is expected to
progressively deteriorate. Cash demand will
be significantly curtailed by the use of
plastic money. However, in the absence of a
recovery in the manufacturing sector, the
trade balance will remain in deficit thereby
perpetuating the current liquidity crunch,”
said OMSEC.Financial markets expert,
Ngonidzashe Makaha said, hyperinflation had
severely dented confidence in the system
resulting in the proliferation of a strong
cash culture supported by the largely
informal nature of the economy.He said when
Zimbabwe adopted the multi-currency system
in 2009, with the US dollar as the primary
currency, broad money supply was relatively
weak.
Source-Financial Gazette
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