Bond notes fuel black market

Source: Bond notes fuel black market | The Financial Gazette February 2, 2017

ZIMBABWE’S bond notes joined other currencies on the black market as importers failed to redeem the so-called surrogate currency for United States dollars to facilitate the importation of critical raw materials and merchandise.
Foreign currency traders were selling the bond notes, introduced initially as an export incentive, but later to quell a liquidity crunch in the economy, at between 1,05 and 1,08 to the greenback.
The Reserve Bank of Zimbabwe (RBZ), which introduced the currency despite public disapproval in November, had pegged the bond notes at par with the US unit.
The RBZ and government have threatened to arrest anyone trading the Zimbabwe currency at a rate apart from what they had officially imposed, a situation that clearly undermines market forces influencing the exchange rates of all currencies trading in the economy.
Zimbabwe ditched its domestic currency in 2009 after it had been ruined by hyperinflation.
It adopted a hard currency regime which embraced a number of currencies, including the South African rand, the Botswana pula, the British pound and the US dollar which now dominates the multiple currency system.
Sources said banks were failing to redeem bond notes for hard currency on demand, despite the RBZ having assured the public that any holder of the domestic unit could cash the notes for US dollars from banks.
In fact, despite promises that the banking public would have a choice between the US dollar and bond notes, most banks were giving bond notes to all depositors withdrawing their money, insisting that they did not have the greenbacks.
The central bank had argued that the bond notes were backed by a US$200 million facility from the African Export-Import Bank (Afreximbank).
It insisted it could not release the US dollar cash from the facility to avoid externalisation of the cash.
The bond notes, it argued, were to act as surrogate currency to the US dollars under that facility and that the public could redeem the local notes for US dollars when they wished to do so.
Bankers said no such facility existed; they were not accepting bond notes in exchange of US dollars because that money had not been unveiled to them by the RBZ.
Although the RBZ had initially released small amounts of bond notes into the market, it has now injected close to US$80 million worth of bond notes into the economy.
Trade in bond notes had therefore been muted because of the small volumes, but these have now started trading due to increased quantities on the market.
Currently, the bond notes are in $2 denominations. Some are available in coins, with a $1 coin being the highest denomination.
“If you want to exchange the equivalent of US$100 in bond notes, we will require a further $5 (in bond notes) on top of that,” one dealer said.
Economic commentator and University of Zimbabwe professor, Tony Hawkins, said bond notes were inevitably going to lose value against other currencies.
“We are going towards a situation where we could have three exchange rates, the 1:1 or dollar for bond note, then we could have a weaker exchange rate for a dollar in the bank, that is cash in the bank that you can’t get out and a dollar in the street. Then you will have another exchange rate between dollars and bond notes,” said Hawkins.
He was referring to a three-tier payment system that has emerged in the country, under which traders were using different pricing models for money in banks, US dollar cash transactions.
Bond notes are being treated the same way as cash held in banks, which is difficult to withdraw or can only possibly be taken out in bond notes.
The RBZ is planning to unveil a set of $5 bond notes when it releases more cash into the market.
There have been fears government could print bond notes far higher than the US$200 Afreximbank facility, but Finance and Economic Development Minister, Patrick Chinamasa, said these fears were without basis.
“We are not foolish people; we will do the correct thing which will maintain the value of the bond notes,” he told legislators recently.
Economist, John Robertson, said Zimbabweans should brace for an increasing scarcity of foreign currency and predicted a thriving black market for US dollars as people sought to dispose bond notes.
“People will be prepared to pay premiums to buy foreign currency because of bond notes,” Robertson warned.
Robertson said productivity in the country was weak, and this would militate against the bond notes.
“The only way out of this is for us to produce more goods for export or to borrow a lot of money from somebody so that the scarcity of foreign currency becomes less serious,” Robertson said.
He added: “We need to persuade the lenders that we can be trusted to do these things so that in two years’ time we can be able to begin to repay them. But those lenders are at this moment very seriously discouraged from doing anything for us because we have not made the changes that are needed in the first place.”  By Farai Mabeza