UPDATE 2-Zimbabwe to issue more ‘bond notes’, raising hyperinflation fears

* Central banks seeks more bond notes beyond $200 million

* Fears printing more bond notes could fuel hyperinflation

* Bond notes trading at discount to U.S. dollar on black market (Adds analyst, opposition)

By MacDonald Dzirutwe

HARARE, July 12 (Reuters) – Zimbabwe’s central bank wants to issue more “bond notes” beyond its stated limit of $200 million, its governor said on Wednesday, in comments likely to stoke fears the country is returning to the era of money printing and hyperinflation.

Governor John Mangudya said the Reserve Bank of Zimbabwe was in talks with an unnamed creditor for a loan to underpin the extra notes, which are needed to counter a shortage of U.S. dollars that is crippling the economy.

“We are in the process of negotiating those facilities and then we’ll come back to yourselves after we have made significant progress,” he told reporters after a lecture at the University of Zimbabwe. He declined to give more details.

Zimbabwe abandoned its own currency in 2009 in favour of the U.S. dollar to end hyperinflation, which had hit 500 billion percent the year before. At the time, Zimbabweans were buying loaves of bread with wads of Z$100 trillion notes.

However, faced with acute dollar shortages, it introduced the bond notes in November, in an attempt to boost the amount of cash in day-to-day circulation.

The notes are scrip, supposedly backed by U.S. dollars loaned to the government, and can be used like cash. Officially, they are pegged to the dollar at a rate of 1:1, but on the street $1 fetches up to 1.20 in bond notes.

The central bank denied the notes were a back-door reintroduction of the discredited Zimbabwe dollar, saying they were backed by a $200 million loan from the Cairo-based Afreximbank, a development bank. It also pledged not to exceed the $200 million limit.

Afreximbank has not confirmed the existence of the loan and declined to comment on Mangudya’s remarks.

Without proper reserves to back them up, the bond notes have no intrinsic value and will be prone to sudden and violent devaluation. The IMF said last week the notes and a rise in bank deposits not backed by dollars were already fuelling inflation, now forecast to reach 9.6 percent next year.

“What the Reserve Bank is doing amounts to money printing. Bond notes are not going to resolve the cash shortages because people lack confidence in the system and they will not keep money in the bank,” Harare-based economist John Robertson said.

The central bank’s website says it has issued more than $160 million in bond notes to date. But cash shortages continue, with banks limiting daily withdrawals to as little as $20.

The opposition People’s Democratic Party, led by former finance minister Tendai Biti, blamed “fiscal indiscipline” on the part of President Robert Mugabe’s administration and said the situation could get worse.

“Instead of extending the bond note facility the state must scrap it,” the party said in a statement. (Additional reporting by Ed Cropley and Ed Stoddard; Editing by Ed Cropley, Larry King)