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The bond notes: Zimbabwe’s currency phobia

By Dumisani Ndlela
There is fear in the air, and it is palpable. At the end of this month, the Reserve Bank of Zimbabwe (RBZ) is planning to introduce bond notes, a so-called surrogate currency of the US dollar.

Reserve Bank of Zimbabwe building in the background
Reserve Bank of Zimbabwe building in the background

Very few people want them, except government and the country’s central bank.

The majority of Zimbabweans, including grannies sleeping on pavements and queuing patiently to withdraw their pensions from banks, would rather toil in the long bank queues to have the US dollar than anything brought about by government.

Where is the danger? Who threatens to inflict pain or harm upon the other?

It is not fear of the unknown; Zimbabweans were badly battered by an unprecedented economic crisis during the decade to 2008, when the country experienced widespread commodity shortages after the local currency was ravaged by hyperinflation, forcing government to eventually ditch the Zimbabwe dollar for the greenback and a basket of other foreign currencies in 2009.

That hard currency regime immediately stabilised the economy, and took it on a path to recovery after sustained and broad-based contraction led to a cumulative decline of nearly 50,3 percent in real gross domestic product (GDP) between 2000 and 2008.

Pensions were wiped out, and lifelong savings held in cash went up in the hyperinflationary smoke.

Many lives that could have been saved were lost, and only those who could thrive in chaos prospered.

The hard currency regime gave people the chance to start again. Pensions have been restored, and people once again took life policies and other investments, believing these were hedged against the US currency.

The economy burst into a post-hyperinflation rebound, registering growth averaging seven percent, while inflation remained in the low single digit levels largely due to the hard currency economy.

Government revenues more than doubled from 16 percent of GDP in 2009 to an estimated 36 percent of GDP in 2012, allowing the restoration of basic public services.

But that suddenly ended in 2013 when GDP growth decelerated from 10,5 percent in 2012 to 4,5 percent in 2013, due to adverse weather conditions, weak demand for key exports, and election-year uncertainty.

GDP expanded by three percent in 2014 and by 1,1 percent last year.

The coalition government, which had avoided deficits, had collapsed in 2013 after a ZANU-PF landslide victory that paved way for the current government.

During the period between January and June 2016, government incurred a cumulative budget deficit of about US$623,2 million, far above the full-year target of US$150 million.

Finance Minister Patrick Chinamasa has projected the deficit to worsen to an estimated US$1 billion by year-end.

Financing of the budget deficit has been primarily through issuance of Treasury bills (TBs) by the RBZ on behalf of government.

Between 2012 and April this year, US$1,2 billion worth of TBs had been issued into the market, and researchers have said these TBs have been the major source of the country’s liquidity crisis, with one researcher noting that there had been a strong co-relation between the time government started injecting TBs in 2012 and the depletion of the stock of hard cash in the economy.

With the RBZ introducing bond notes, there has been an inevitable sense of déjà vu, with many warning that the Zimbabwe dollar was on its way back.

“It is critical to emphasise that the introduction of bond notes does not mark the return of the Zimbabwe dollar through the back door,” said RBZ governor, John Mangudya, trying to reassure a skeptical nation.

He said the bank had “heard and taken note of the public’s concerns, fear, anxiety and skepticism of bond notes which all boils down to the general lack of trust and confidence within the economy”.

Yes, Zimbabweans have lost trust and confidence in their politicians, and it is unlikely that a statement of commitment from Mangudya will reassure anyone.

Last week, former vice president, Joice Mujuru, lost a case in which she was seeking access to the Constitutional Court (Con-Court) to challenge the planned introduction of the bond notes.

The full bench of the Con-Court, led by chief justice Godfrey Chidyausiku, dismissed Mujuru’s application, saying it was “premature and speculative” on the basis that the bond notes were not yet in circulation.

Deputy chief justice, Luke Malaba, told Mujuru: “You have to wait for the promulgation of an Act of Parliament or a Statutory Instrument first and you come back to court to challenge the legal framework’s constitutionality.

The applicant does not have enough facts for her case now and when she gets the full facts, she can still come back to court with the challenge.

“At the moment, no one knows how government will introduce the notes and it is premature to challenge the constitutionality of the law that it is not yet in place.

The bond notes are not yet in circulation and no one knows how they look like.

“You allege that bond notes will be illegally introduced, but government said it will do it in terms of the law. On what basis do you want us to believe you? An allegation must not just spring out from the air,” he said.

In other words, Mujuru has to wait until the bond notes are introduced in order to seek recourse from the court.

But the danger is that once the bond notes are introduced, it may be too late to reverse the harm they may have already inflicted on people.

There is speculation that the bond notes would be used by government to clear all US dollar debts acquired by government since the introduction of a hard currency regime in 2009.

These debts amount to over US$1 billion.

They are, precisely, the reason why the country is facing the currency cash crisis; government can no longer pay these debts, which are due for repayment.

Printing bond notes would give it the cash to repay these debts.

There has to be therefore pre-emption of possible harm from the planned measures.

To dismiss a citizen’s quest for recourse against a possibly harmful act that has been threatened but not yet implemented on the basis that such a quest is based on speculation may have grave consequences on the people.

The Con-Court should have put government, the RBZ and all those acting on behalf of these institutions on their defence — Zimbabweans need the evidence of the institutions backing the printing of these bond notes, the agreements with the printer of these bond notes, and even the law likely to be used to print and circulate the currency.

In any case, it is no longer an issue of conjecture that the bond notes will be introduced; Mangudya indicated in his mid-term monetary policy review that the bond notes would be in the market by end of October.

The RBZ has not adequately warned Zimbabweans about the risk of the planned bond notes; it has simply overemphasised the benefits, noting that the bond notes, which will be a surrogate currency of the US dollar, would boost industry and inject liquidity into the economy.

The RBZ says the bond notes are backed by a US$200 million facility from the African Export and Import Bank (Afreximbank).

Afreximbank has not confirmed the existence of this facility, and international financial institutions have equally expressed ignorance about its existence.

On account of that guarantee, a holder of bond notes would be able to easily redeem them for US dollars from their banks on demand.

This would be unbelievable even to a kindergarten kid.

If banks cannot pay depositors US dollars in their accounts, where will they get the greenbacks to pay for the bond notes?

The RBZ and government have not shown this commitment from Afreximbank to anyone, including the country’s bankers.

How does government then build confidence and trust in such an environment?

Just as the failure to warn of product risk is an established basis for a liability suit against manufacturers of a harmful product, will the Con-Court entertain those who eventually claim compensation from the RBZ and government after being hurt by bond notes once they start circulating?

In her application, Mujuru argued that bond notes were not provided for under the RBZ Act, and that despite assigning the same value to bond notes as the United States dollar, the bond notes were likely to depreciate, resulting in losses to their holders.

“Money is property and a bond note, not being money, can never substitute money. There is therefore an infringement of the right protected by Section 71(2) of the Constitution to the extent that holders of foreign currency will be forced to use or hold bond notes in the place of their money.

“Whatever the respondents may seek to say about the bond note, it is clearly a disguised Zimbabwean dollar that is being introduced through the back door. The law does not allow a back door approach. If they wish to re-introduce the Zimbabwean dollar they must follow the law and call it by name given its demonetisation,” she said.

Mangudya, who dismissed Mujuru’s application as “politicking”, has insisted that he is addressing the public concerns by planning to introduce smaller denominations of bond notes of $2 and $5.

He has also proposed the setting up of an independent board to have an oversight role on the issuance of bond notes in the economy.

He said bond notes will be used as an incentive to exporters to promote economic growth and foreign currency generation by the industrial sector.

“Doing nothing to incentivise exporters of goods and services whilst at the same time desiring to maintain the multi-currency exchange system is not only contradictory but also imprudent,” he said.