Source: Financial Gazette
ZIMBABWE’S planned introduction of ‘bond notes’ is worsening its cash crisis while government’s excessive borrowing on the domestic market is straining the financial system, global ratings agency Moody’s has said.
Zimbabwe plans to introduce local bond notes, a token currency that will trade at par with the US dollar, early next month to cure a persistent liquidity crunch, but Moody’s said that has stoked fears of the return a much-disliked domestic currency.
The southern African country ditched its inflation-ravaged currency in 2009 and adopted a basket of currencies, largely anchored by the US dollar, managing to tame hyperinflation but has faced cash shortages since February.
Zimbabwe has been running structural current account deficits since the official dollarization of the economy in 2009. These deficits, alongside weak capital inflows have led to a steady drain of dollars out of the economy.
The bond notes, to be injected through a performance-related export scheme – had been intended to ease the shortage of cash in the economy but have spread panic in the market.
“Growing cash and liquidity challenges in the Zimbabwean banking sector have intensified ahead of the government’s planned introduction of bond notes,” Moody’s in a report: Drivers and Credit Implications of Zimbabwe’s Cash and Liquidity Shortages.
“Although the bond notes are intended to ease the cash shortage, there are concerns in Zimbabwe that they represent the first step towards the return of a domestic currency. This has exacerbated net deposit withdrawals and cash hoarding.”
The cash shortages are taking place against the backdrop of a domestic economic crisis fuelled by low global and regional growth, prolonged poor commodity prices, and severe drought that has left at least four million Zimbabweans in need of food aid.
“These factors have combined to exacerbate existing domestic challenges stemming from deflation, growth stagnation, weakening fiscal stance and persistently low productivity in Zimbabwe,” noted Moody’s.
“The country’s external competitiveness has been impeded by a sizeable real exchange rate over-valuation, driven in part by the multicurrency regime peg to the resurgent US dollar.”
The agency said government’s increasing fiscal deficit and excessive treasury bill issuance, required to finance its activities, have contributed to the cash and liquidity shortage by depleting the banking system’s liquid assets.
Reports suggest that the government has failed to honour TBs issued by the central bank worth $1,5 billion on maturity, with the paper being rolled over.
“The government has also contributed to a strain on the banking sector via heavy borrowing from domestic banks, even though it has limited capacity to service the debt and has to roll it over instead, weakening the banks’ liquidity positions and solvency,” said Moody’s.
It adds that Zimbabwe’s balance of payment challenges will continue unless the country implements sustainable fiscal policies and comprehensive structural reforms. With protracted balance of payments pressures, dollar shortages are likely to intensify.
In addition, the inability of enterprises and households to obtain sufficient cash for daily transactions will weaken economic activity and put pressure on growth, in turn lowering government revenues, said Moody’s.
Source: Financial Gazette