Plan to introduce bond notes fuels cash crisis

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.”

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