Source: Bond notes and Zim’s currency debate – The Zimbabwe Independent November 30, 2018
WHEN Reserve Bank of Zimbabwe governor John Mangudya announced in 2016 plans to issue bond notes, a currency he claimed had the same value as the US dollar, many were apprehensive.
By Chris Muronzi
It was backed by a US$200 million Afreximbank facility, he said. If it failed, he would step down, he assured the public.
He had previously introduced bond coins to address small change problems in the economy. Again, the facility was backed by an Afreximbank facility.
Unlike in the case of the bond coins, Afreximbank had not issued a statement confirming the existence of the facility backing the new bond notes.
Many were suspicious.
Others feared he was attempting to introduce the Zimbabwe dollar through the back door.
Only businessman Fred Mtanda took great exception to Mangudya’s plans and hired one of the best legal minds in the country, David Drury, to compel the central bank to produce evidence of the existence of a facility backing the bond notes.
The court threw out Mtanda’s court application.
One did not need to visit the genius pub to predict what would happen. Immediately after Mangudya announced his plans, the Zimbabwe Independent warned of the impending dangers through various scenarios.
And these have come to pass as evidenced by the currency misery in the economy currently. To many, the central bank’s plans smacked of an underlying motive to dispossess the citizens of their hard-earned US dollars.
After enduring one of the worst value destruction phases in recent years, thanks to hyperinflation fuelled by former central bank boss Gideon Gono’s unrestrained printing of the Zimbabwe dollar during his term of office, Zimbabweans wanted to play it safe.
Secretly, many feared they would find their hard currency gone.
A Japanese op-ed writer Ken Yamamoto aptly captured the underlying concerns at the time, calling it “one of the greatest robberies by any government ever”.
“As English author Shakespeare wrote, ‘a rose by any other name would smell as sweet’. I would hazard to say a skunk by any other name would smell as bad. This is the trouble with the RBZ’s proposed bond notes,” he wrote at the time.
“It’s the Zimbabwean dollar coming back cloaked under an Afreximbank facility which nobody has seen except the people that claim it exists.
“This is why the Atlantic magazine would say that Zimbabwe is printing its own US dollar bills because it’s ridiculous to call them US dollars. It’s deceitful because currency is backed by real value, you can’t just make a claim that you are pegging your own notes to the US dollar that are not backed by known value. Currencies can be backed by gold and other precious metals, but not backed by another currency. Never think that this new measure is the same as the bond coins one.”
He added that the proposal was a disingenuous plan to con Zimbabwe of their hard-earned greenbacks.
“Currency bonded to some debt somewhere doesn’t exist in conventional economics — it has the potential to be some form of Ponzi scheme. It’s fictitious, which is why it’s cloaked as an export incentive. You can’t take money deposited in genuine bank accounts and then exchange it for fictitious money.
“It’s for Zimbabwean lawyers to explore if the bond notes and the forced exchange of US dollars for a softening South African rand is lawful, but one would have to be an idiot to accept the rand since it’s a soft currency and (former South African president Jacob) Mr Zuma’s antics of lurching from one scandal to another will see it continue to see-saw. Therefore, a measure created at the whims and caprices of a political mafia, which has the effect of destroying the wealth of citizens is problematic from every perspective,” Yamamoto added.
Within months of introducing the bond notes, the currency found itself trading at varying discounts to the US dollar, an indication that the market did not buy the official line that it was at par with the US dollar.
As time progressed, the value of the bond note against the US dollar fell further to around 40%.
By the time former president Robert Mugabe was forced to step down, a year after the introduction of the currency, electronic transactions were discounted by as much as 70% while hard cash was around 30%.
Cash shortages in the economy had helped sustain the value of the bond note against the US dollar.
The stock market has reached an all-time high of US$16 billion valuation by November 2018 in response to inflationary pressures as investors piled into stocks to preserve value.
With the coming in of the new president, Emmerson Mnangagwa, after the military coup in November last year, it was felt that the inflationary fears had subsided. The stock market came down to just below US$9 billion from US$16 billion in a week of trades. The discount rate between the bond and the US dollar firmed up a bit and only lost value further in the days leading to the elections.
Fast-forward to now, the discount rate is at 340% against the US dollar. In his monetary policy a month ago, monetary authorities changed tune. He now says there is need to open foreign currency accounts. The announcement means that the existing bank accounts are no longer US dollar-denominated accounts.
The news triggered the massive devaluation of the local currency with the US dollar trading at a premium of 600% to the bond or US$1:6 bond/local currencies.
It seems Zimbabweans have been robbed yet again.
Although government denies involvement on the parallel market foreign currency activities, previously government was a big player in the black market to secure foreign exchange for Mugabe’s government.
Just last week, Ncube announced that duty payable on vehicle imports would be payable in US dollars. His boss, Mnangagwa, defended the position over the weekend.
This lends credibility to fears in the country government wants the economy re-dollarised. Analysts say although the move to dollarise is a step in the right direction given the rising inflationary pressures, government needs to be responsible for the mess it has created.
An estimated US$9,5 billion in bonds and RTGS balances is in the economy or in bank accounts. But could this have been a ploy to steal from the masses?
Many believe this to have been a well-orchestrated heist by authorities to rob Zimbabweans of their hard currency.
Yet again, it is not clear what is going to happen to ordinary Zimbabweans’ savings and investments alike.
Will the currency be demonitised or will the monetary authorities leave the currency at the mercy of market forces to clear its mess.