Why we must reject the Bond Notes

By Mudhara Chipikiri

We have been down this road before. Many will remember the billions, trillions, quadrillions and sextillions. We were left holding the useless bond paper after the Chefs, through the Reserve Bank of Zimbabwe (RBZ), wiped out all the foreign currency from the market and the forced liquidation of private foreign currency accounts.

They parceled out all that foreign currency amongst themselves, thereby creating a $1.4 billion hole at the RBZ. And of course a well-crafted two thirds majority in Parliament approved the Assumption of this debt by the Government of Zimbabwe (GOZ), thus making the current and future tax payer liable.

They go scot free, laughing all the way to overseas banks.

As if that was not enough, after dollarization, (which was forced upon them by Kombis I believe) the same politicians went back to the banks and looted in United States Dollars. With the active participation of management, they looted banks, especially in the institutions in which they have direct and indirect control.

They looted the National Social Security Authority (NSSA) but that is a story for another day. The “loans” were never paid back and it is the failure to repay these loans that precipitated the liquidity crisis that has been on everyone’s lips since about 2011/2012.

The creation of the Zimbabwe Asset Management Company (ZAMCO), to warehouse all the bad debts from the banking sector was a culmination of a grand strategy to rob the banks and the banking public. It was legalized stealing. Think about it. What kind of country encourages its banks to engage in bad lending practices by offering to buy the bad loans?

That’s what ZAMCO does. Now it’s true that not all the bad debts bought by ZAMCO are related to politicians, but there is a good reason why the RBZ, with the support of the GOZ, went out of their way to issue Treasury Bills (TBs) as a way of paying for these bad debts. Which then brings us to another role the RBZ and GOZ have had in bringing about the present cash crisis; these very same TBs.

Two issues arise out of these TBs. Firstly by issuing them at all, the GOZ is effectively printing money, in this case US dollars. Former Minister of Finance, Tendai Biti made reference to this a week or so ago and he is right.  The GOZ’s finances are so weak because ZIMRA is not collecting enough to meet ongoing expenditures.

ZIMRA cannot, and will not, any time soon, collect enough, because the economy is in comatose. Unless there is a significant shift in the configuration of the economy, there is no future to talk about, and hence any TBs issued today are not worth the paper they are printed on.

So essentially, what transpired is that those banks who sold bad debt to ZAMCO received a piece of paper which may or may not have helped their liquidity positions at all.

At best they passed accounting entries which would make the balance sheets clean but there is no cash to support that paper. Is it any wonder then that their Nostro Accounts overseas remain unfunded?

The second aspect about TBs is that the beneficiary banks apparently traded some of this paper at a discount. Essentially they may have sold this paper to other institutions such as pension funds and such other long term investors, but at a discount.

So for instance TBs worth $10 million might have been sold for say $9 million. I believe quite a bit of this has been happening in the market. Some of the money from these TBs proceeds has then found itself on the way out to buy luxury cars for government officials including the bosses in the military establishment.

At its simplest level, that is an outflow from the country which is contributory to the liquidity and cash crisis. Interestingly it appears that favored business people are being issued TBs left right and centre, which TBs are being sold at a discount to naïve banking institutions.

The proceeds of those discounted TBs again are being used to fund the luxurious lives of our erstwhile politicians. In the meantime the banks buying this paper at a “profit” are doing so at the expense of their own liquidity, which then manifests itself as a cash crisis.

Now coming specifically to the proposal to introduce the Bond Notes (Bond Paper!), I have looked at the Governor’s rationale, his reasoning and how he hopes this will work and I puzzled that  Dr. John is just tinkering like his predecessor.

Zimbabwe, listen. This is a well thought out strategy to take your precious US dollars, much in the same way Gono raided everyone prior to 2009.

The current RBZ Governor is a good student of Governor Gideon Gono. It is no accident that he succeeded Gono at both CBZ and the RBZ. He is doing well to cover up his master’s footsteps. Let me illustrate the fallacy of his proposal.

Let us take the example of any of the large supermarket groups in Zimbabwe. My estimate is that at the very minimum, they are importing 50% of what they are selling in their stores right now. It could very well be much more or less for that matter, but let’s work with that. Let’s assume that they sell the equivalent of US$10 million in one quarter but receive 100% of their funds in Bond Notes.

Let us also assume that their Bank, will take in that amount and credit their account with real US$10 million. Fine and good, right? But then they need to restock their shelves with a new shipment of say US$7 million, real money not Bond Notes because as we noted above, they have to import most of their stocks. If their bankers accept to fund that order, there is going to be an outflow of US$7 million real money.

That outflow is an outflow from that bank and that money is not coming from the supermarket’s account! Repeat that cycle three times, that Bank is going to be short $21 million on its foreign currency position. Replicate this scenario across the country and across various industries and you can see the fallacy of Mangudya’s solution.

I don’t think there is a Zimbabwean bank that is that daft. But then neither is Mangudya! So why is he doing it? Simple. It’s a con job. He just wants to be seen to have done something. It’s a shot in the dark. In the end it will be grief for all of us if we accept these bond notes. We are going back to the billions, trillions, quadrillions and sextillions.

Again let us look at the requirement that all prices be reflected in Rands and US dollars. Given the recent history of the Rand, can you imagine the administrative burden this brings to the supermarkets! In any case, the common people in the street have already rendered their judgment on the Rand. Forcing the Rand down the people’s throats will only see the re-emergence of the parallel market. Last time I checked, things didn’t go too well with that. Billions, trillions, quadrillions…….

 Let me conclude by making reference to the factors identified by the RBZ as being responsible for the present crisis. It is important to review these factors and evaluate whether in fact the proposed solutions mitigate the situation on the ground at all. Essentially what are seen as problems by the RBZ are the following aspects: 

a)        the USD has become to be more of a commodity, a safe haven currency or asset than a medium of exchange.

b)      Low levels of use of plastic money and the real time gross settlement (RTGS) platforms- Zimbabwe is predominantly a cash economy

c)       Low levels of local production to meet consumer demand, leading to higher demand for foreign exchange to import consumer goods

d)      Low consumer and business confidence as reflected by high appetite by both consumers and business to keep cash outside the banking system.

e)      Inefficient distribution and utilization of scarce foreign exchange resources 

Quite frankly these all appear to be symptoms and not problems. I would compress these into two specific symptoms namely LACK OF PRODUCTIVITY and LACK OF CONFIDENCE in the economy. It is critical to distinguish between PROBLEMS and SYMPTOMS. PROBLEMS can be identified by the manifesting SYMPTOMS, just as Physicians use symptoms to identify what ails a patient. They do not treat the symptoms.

The lack of PRODUCTIVITY and CONFIDENCE in Zimbabwe are symptoms that have manifested themselves for many years and are crying for solutions to the underlying problems of poor economic policies and the absence of the rule of law. It is therefore pointless introducing cash limits in a market where there is a crisis of confidence in the first place. That is dowsing a fire with petrol. And Mangudya should know better. 

When Dr.Gono was appointed RBZ Governor in 2003, I predicted that this was the end of Zimbabwe as we knew it. I was vindicated by 2006 when we chopped off the first three zeroes from our currency. You all know what happened thereafter.

Well, let me make another prediction: If Zimbabweans go ahead and accept the circulation of the Bond Notes at this juncture, Gideon Gono will be like a saint compared to Mangudya and we will all be asking the President to please bring Gideon Gono back. 

It would be remiss of me to conclude without proffering some ideas as to how things should be handled to avoid the coming Armageddon. Here is what I know: our economic policies are wrong, our governance sucks and our politics is rotten.

Change that and we will set ourselves on a prosperous trajectory. The people who brought us into the desert cannot lead us to the Promised Land because that would be a repudiation of their last 36 years in power.

Marco Rubio, one of the failed candidates in the most recent Republican primary election in the USA, made a remarkable statement about failing policies.

“We must change the policies by changing the people who make those policies!” In short, change the President. Change Parliament. Change the Governor of the Reserve Bank. Simple. Otherwise, billions, trillions…. 

Chipikiri is an Independent Voter and is contactable at [email protected]