It’s not the bond notes- Zimbabweans just don’t trust the government and the banks

In order to ease the shortage of currency in circulation, the government is planning to introduce 'bond notes', backed by an off-shore facility amounting to $200 million. However, the authorities' lack of credibility is a major obstacle to the introduction of the bond notes, as most Zimbabweans perceive the move by the Reserve Bank of Zimbabwe as an attempt to reintroduce the Zimbabwean dollar, a currency associated with the period of hyperinflation and severe economic crisis.

The RBZ’s announcement that the bond notes would be introduced in November and amount to $75 million by the end of the year has triggered both reduced deposits and increased withdrawals from the banking system, exacerbating liquidity challenges in the banking sector. Shortages of physical cash have prompted banks to further reduce the maximum daily withdrawal limits from $100 to $300 to currently just $20 to $100 a day.

This behaviour is also a result of the population’s mistrust in the banking sector, with commercial banks’ balance sheets weakening due to reduced share of cash and nostro accounts and a rising share of government treasury bills. Besides cash, balances in the banking system’s nostro (correspondent) accounts – accounts held in banks abroad to facilitate international settlements – are also running low. They have fallen to just $156 million as of March 2016, from $423 million in 2009. This is primarily due to the trade account dynamics outlined below. The lack of ‘convertible dollars’ – which we define as physical cash and nostro account balances – has also been aggravated by portfolio outflows initiated by foreign investors, who accounted for about 50% of capitalization of the Zimbabwe Stock Exchange.

The government's weak fiscal situation also threatens to undermine financial stability as the government currently lacks the capacity to service the debt, and is rolling over its liabilities to the banking sector. Given that the government has doubtful capacity to repay these liabilities, the solvency of the banking sector is also at risk as government T-bills now exceed the total amount of banking sector

capital. Although the prudential liquidity ratio reported by the Reserve Bank is high, T-bills are included in the calculation of liquid assets. Excluding these claims would reduce the liquid assets/total assets ratio from 37% to just 18% as of March 2016. Furthermore, the rapid increase in bank purchases of government securities has strengthened the sovereign-bank feedback loop, increasing the risk of a banking sector crisis.

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