Zimbabwe: How bond notes could ruin economy

Source: Zimbabwe: How bond notes could ruin economy | The Financial Gazette December 8, 2016

THE apparent reason for the introduction of bond notes by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya last week was to fund export incentives of up to five percent.
But it now appears the bond notes have become widely available to mitigate a cash crunch that has troubled the country for much of this year.
The first tranche of bond notes worth US$10 million was released into the market in the form of cash withdrawals by non-exporters.
Analysts said Zimbabweans appeared to have no choice but to grudgingly accept the so-called surrogate currency, said to have the backing of a US$200 million facility from the Cairo-headquartered African Export and Import Bank (Afreximbank).
Many fear this is government’s first step towards resurrecting the Zimbabwe dollar, which was ditched in 2009 in favour of a multiple currency regime dominated by the US dollar.
Many believe government will soon start running its printing press again, churning out the bond notes to fund a number of its commitments and buy foreign currency from the market for its external obligations.
This, it is feared, will result in another hyperinflationary scourge probably of the magnitude witnessed in 2008 that forced the country to abandon its currency.
Many ordinary citizens lost their life savings when the currency lost value.
For ordinary Zimbabweans, memories of the collapse and demise of the Zimbabwean dollar in 2009 and the hyperinflation that caused its destruction are still fresh in their minds.
The initial release of bond notes through the financial system was in small denominations of US$2, US$5 denominations and US$1 bond coins.
Bond coins have been in circulation for more than a year, but until now the largest denomination was 50 cents.
Mangudya said about US$75 million worth of bond notes will be pumped onto the market before the end of this month.
On introduction last week, demand for bond notes was reportedly overwhelming, with long queues at banks as depositors sought to withdraw their money.
Analysts said the perceived success of the bond notes, which have been pegged at par against the United States dollar, could force government to print even larger volumes to enable it to pay civil servants their salaries and annual bonuses.
The cash crunch has led to delays in monthly salary payment to civil servants.
The situation has been worsened by the country’s inability to address the deficit by borrowing from international lenders, such as the World Bank, the International Monetary Fund and the African Development Bank who have suspended their lending to the country due to failure to implement economic reforms aimed at clearing debt arrears.
Economist, Godfrey Kanyenze, said government had cheated the public on the bond notes, warning that the possibility of printing more volumes than initially promised was very high.
He said government had failed to address issues of trust and confidence before introducing the bond notes.
“They want to give an impression that the move to introduce bond notes has been successful but this is misnomer,” said Kanyenze.
“How can it be successful when we don’t have an alternative? The truth of the matter is that we are going to have a parallel market. We can’t trust these bond notes whose value is uncertain,” he said.
He added: “People have been cheated. The governor himself is on record saying the bond notes are for export incentives. He told the nation that if we don’t want them we are not forced to take them. But the truth of the matter is that people don’t have a choice and have been forced to accept bond notes in their day to day transactions.”
He warned that recent foreign exchange controls had already created challenges in the economy, with fuel shortages now evident.
Fuel retailers were already limiting transactions using debit cards and some were even declining bond notes and demanding hard currency for fuel purchases.
Kanyenze added: “We can see that their idea of introducing smaller denominations of US$5, US$2 bond notes and US$1 bond coins is part of their grand plan to make us scream for higher denominations because there is a shortage of these smaller denominations already. So this is a hollow victory for government. It (the victory) is just in name because it has not addressed the real issues of trust and confidence in the economy.
“You can already see where they want to go. They will soon say our people have screamed for higher denominations of bond notes so we are printing more and we will pay civil servants using them. They want to claim that it has been a successful story but how can it be when there is no alternative? People just end up taking the bond notes because they want to transact. It’s a catch 22 situation.”
Public Service, Labour and Social Welfare Minister, told the Financial Gazette that government had not finalised the issue of civil servants’ bonuses.  Mupfumira said: “We haven’t finalised on the issue. We are still to meet our principal (President Robert Mugabe).”

Asked if government was planning to use bond notes to pay civil servants, Mupfumira said: “I can’t comment on that now because we are yet to finalise the issue. But to me, a salary is a salary whether it’s in bond notes or United States dollars, it’s not a big issue. What is key is that do we have the capacity to pay.”
Government has largely ignored the Parliamentary process that was meant to gather views from the public before introduction of the bond notes.
Vice President Emmerson Mnangagwa dismissively told concerned Parliamentarians that they will now have to simply embark on their outreach programme with the notes and explain their features to the public.
Yet the public outreach was meant to inform the law making process and get to understand public expectations over the bond notes.
Zimbabwe officially adopted a basket of foreign currencies which included the South African rand, the Botswana pula, the British pound, the Euros, and the United States (US) in 2009 to end a hyperinflationary crisis that had resulted in widespread commodity shortages and the collapse of all economic activities.
In recent months the country faced severe liquidity problems, with local banks running out of US dollars due to an import-export imbalance.
Imports widened significantly and the outflow of cash from the country increased.
This gradually depleted the stock of money in the economy, and the situation was worsened by the fact that government started borrowing heavily from banks and eventually failed to raise the cash to pay back its debts.
This worsened the cash crisis.
Banks were forced to set withdrawal limits of as little as US$50 a day and hundreds of Zimbabweans have been sleeping in bank queues to withdraw their money from banks.
In the run-up to the introduction of bond notes, which were first announced in May this year, opposition parties and civil society groups protested against the new currency, saying it would worsen the country’s economy.
They are still planning more demonstrations against the bond notes.
Former vice president, Joice Mujuru, who now leads the Zimbabwe People First and Harare businessman, Fred Mutandah, approached the courts in a bid to stop the RBZ from launching the bond notes, saying the move was unconstitutional and an infringement on fundamental rights.
Mutandah has since lost his High Court case, but that for Mujuru is yet to be determined.
Lawyers have also approached the Constitutional Court challenging the use of Presidential Powers in promulgating the law supporting the introduction of bond notes.
A Parliamentary process was then started to create necessary legislation for the bond notes, but even before it had commenced, the RBZ and government surprisingly went ahead with introduction of the bond notes.
The central bank has attributed the cash shortages to a dysfunctional multi-currency system under which the United States dollar has been an anchor currency.
Mangudya has insisted that rather than being used as a medium of exchange, the US dollar had become a commodity or a safe haven currency or asset.
Initially some retailers refused to accept the newly introduced bond notes, saying they were still to acquaint themselves with the key security features of the surrogate currency.
This was after bankers reportedly raised concern over the manner and time-frame in which they were told to collect the bond notes.
Major retail outlets and informal traders are now accepting the bond notes.

However, some consumers have been rejecting bond notes as change after tendering US dollar notes when buying from retailers.
There has also been concern by the public that same denomination bond notes slightly differ in design; this has initially raised fears that there were fake bond notes already in circulation.
Analysts said confidence building seems to be the missing link in the bond notes discourse.
There has been panic buying by some consumers, with some retailers increasing prices of some goods.
This has been largely due to fears of a return to hyperinflation, which peaked in 2008 and led to widespread shortages of basic goods and foodstuffs.
Consumers said they feared that shops could fail to restock because of foreign currency shortages.
But Confederation of Zimbabwe Retailers president, Denford Mutashu, said retailers had responded positively to bond notes and denied that there was panic buying.
“There is no panic buying by consumers and shops are fully stocked,” he said.
Mutashu confirmed price increases by some retailers after bond notes were introduced, saying they had engaged the culprits.
“We discovered it was not as widespread after our offices were inundated with calls by disgruntled consumers. There is no need for the public to panic,” said Mutashu.
A snap survey however revealed that there was a lot of panic buying at wholesales and major retail outlets.
Last week, several pressure groups led by #Tajamuka, a grouping of youths that have had several run-ins with authorities in recent months, staged protests against bond notes.
However, the Zimbabwe Republic Police deployed police details that far outnumbered protestors, swiftly crushing the demonstrations in central Harare.
The sustained value of currencies is based on trust, and bond notes will lose value if the public do not trust them.
They are only as valuable as consumers and retailers believe them to be.
So are bond notes a temporary or permanent solution to the cash crisis?
The bond notes are necessary for the current problems, but there is need to come up with long term solutions to the economy.
Analysts said bond notes would bring transacting convenience in addition to monetising the real time gross settlement system for individuals and businesses that do not have access to electronic transacting platforms but was not a long term solution.
“Mangudya has good intentions on bond notes from a technical aspect. Bond notes are monetising the real time gross settlement and swiping (debt card transactions). In simple terms they are just the physical side of these payment systems,” a banker said.
Financial consultant, Ngonidzaishe Makaha, said bond notes could only be sustained by an increase in production.
“Take a hypothetical family which grows tomatoes for a living, when yields are low and it happens for successive seasons, the amount of money at the family’s disposal is bound to run low. The family therefore requires a stimulant to reverse the situation. The stimulant Zimbabwe needs is investment and savings. These are two fundamentals that can prop up the economy and ease some of the liquidity challenges the country is facing,” Makaha said.
He said in the absence of production, “it is absolutely inconceivable to hope for a miracle when the economy slides and liquidity becomes an issue”.
“Low incomes and high unemployment has led to a situation of low aggregate demand. This situation is damaging as it further impacts on production capacity,” he said.
Makaha said demand for money was determined by three motives — transaction, precaution and speculation.
Makaha said individuals and firms have lost trust in the financial system due to bank failures.
In a normal economy, speculative tendencies drive people to either save or invest but the situation is different in Zimbabwe.
The speculative motive in Zimbabwe is largely driven by fear of a return to the Zimbabwe dollar.
This can be argued as the reason why people have preferred to hold on to their money rather than using the financial system.