Zimbabwe’s new Bond Notes: a unique solution or a return to the dark days?


I was reading a report of the IMF released today (May 4 2016), following the IMF’s Executive Board meeting during which the case of Zimbabwe was discussed following an Article IV Consultation and Third Review under the Staff Monitored Program (SMP). I was trying to make sense of IMF statement when an announcement from Harare arrived, to the effect that the Zimbabwean government was introducing a new set of “bond notes” to be used alongside the current multi-currency regime. The purported reason for these #bondnotes is to ease the liquidity crisis which the country is going through. There have been severe cash shortages in recent months, with long queues evident at local banking halls.

Unsurprisingly, the issue of #bondnotes is the trending topic in Zimbabwe at the moment. It has come as a shock to many people, although, if they had paid attention long before, the warming signals were there when the government first introduced what they called “bond coins” two years ago in December 2014. The government said the purpose of those unique coins was to create change for ease of transactions since there were no US dollar coins on the market. I remember saying at the time that the bond coin was probably a dry run for the introduction of a new Zimbabwean currency. Some said it was wild speculation. The Reserve Bank of Zimbabwe (RBZ) and government sources quickly moved to dispel that as false speculation.

The RBZ has been at pains over the past year to reassure the market that there would be no return of the Zimbabwe dollar or other local currency. Indeed, the old Zimbabwe dollar was de-monetised in June last year apparently at a cost of $20 million. This measure was supposed to give confidence to the market that there would be no return to the old Zimbabwe dollar days. The Zimbabwe dollar had been replaced by a new multi-currency regime in early 2009.

However, the latest introduction of the #bondnotes which is supposed to be backed by a $200 million facility from the African Export and Import Bank (AFREXIM) has raised new concerns, especially as the new measure has come without prior notice.

The irony is that in its report today, the IMF had commended the RBZ for taking measures to restore confidence in the financial sector. But that was before the announcement of the new #bondnotes and I wonder if the IMF were aware of this impending announcement when they held their Executive Board meeting yesterday. The new measures include setting daily maximum withdrawals of $1,000, Euro 1,000 and R20,000. It’s interesting to that the USD limit and the Euro limit are equal although their values on the currency markets are obviously different – is this another arbitrary command which shows scant regard for market rates?

However, even before this new RBZ daily limit, commercial banks had already started to impose daily maximum withdrawal limits because of the cash crunch. They had also closed down some of their ATMs (cash machines) for the same reason. For the public, it means their funds are locked up in banks. The drastic reduction in the daily maximum withdrawal limit by the RBZ is probably designed to prevent a bank-run in the wake of the new #bondnotes as customers scurry to hedge against losses by withdrawing their US dollar savings to keep them in a more stable currency.

But still, trust in the banking system will be severely eroded, especially after many people had their fingers burnt before. Most people already stayed away from the banking system anyway, after their bad experiences in the pre-2009 period when they lost their savings after dollarization and before that, to hyperinflation as their funds were locked in bank accounts. Those who use the banking system among ordinary people are those who cannot avoid it, probably because their wages are paid directly into banks. But oft-times, because of prohibitive bank charges, most withdraw all their meagre earnings as soon as they are paid and spend or keep the cash under their mattresses. The bulk of the population, with an 85% unemployment rate have resorted to a hunter-gatherer lifestyle in the informal markets and have no use for banking. Actually, most low-income families survive through an informal system of “the round” whereby a group of people contribute to a pot of money, which rotates among group members every month or week. It’s based on trust and most people trust it far better than the formal banking system which imposes extortionate charges. Thus the banking system was already suffering from a crisis of confidence in the market and now, more will be driven away.

The new RBZ measures also provide that 40% of all new US dollar receipts will be converted into the South African Rand. This will affect export earnings but notably, diaspora remittances and NGO funds are exempt from this measure. The diaspora exemption is probably designed as an incentive to a sector that has risen to become one of the country’s highest and most consistent foreign currency earners in recent years – a remarkable position for the diaspora which was once derided by President Mugabe. The exemption will give the diaspora some comfort but it will be very shaky at best. The last time the RBZ raided foreign currency accounts in 2007, it was after reassurances that private foreign currency account holders’ funds would be safe. It was never returned and several lawsuits have hit a brick-wall after the government passed a law to ring-fence and protect the central banks’ assets. In short, few Zimbabweans take the government’s reassurances seriously because they can change at any time and without prior notice.

But what effect will this measure 40% automatic conversion into the ZAR have on exporters? They are probably targeted because they have no choice. But the measure comes on a day when the IMF has just announced that one of the problems in the economy are the low external inflows and commodity prices: “Economic activity is severely constrained by tight liquidity conditions resulting from limited external inflows and lower commodity prices”. So exporters are already feeling the pinch, and now they will have to face the currency risk of an unstable rand, with 40% of their US dollar receipts immediately being converted to the ZAR.

People are now expressing worries that the dark old days of 8 years ago may be coming back. The majority of Zimbabweans who lived through that period don’t want to be reminded of 2008, by far the worst year, when according to economist Steve Hanke of the Cato Institute, hyperinflation peaked at a monthly rate of 79,6 billion per cent in mid-November 2008.  At the same time, the annual inflation rate was rated 89.7 Sextillion percent. It reportedly became the first hyperinflation in the world in the 21st century. The currency was worthless. Then Zimbabweans earned the title of being the world’s poorest millionaires, as the highest currency denomination reached 100 Trillion dollars in early 2009. Shortages were rampant, supermarket shelves were empty, and those who could afford, drove to neighbouring South Africa and Botswana to buy groceries. Although the currency was pretty much useless, the government kept the printing machines at Fidelity Printers, the government printer, very busy.

Printing money presented a massive rent-seeking opportunity for those who controlled it and their associates. They could print tonnes of cash, then use agents to swoop onto the streets to buy out foreign currency. The “change-money agents” as they were known then, made a cart-load of money. But it couldn’t last forever and soon the cash dried up. The leafy suburbs of Harare, such as Glen Lorne, are museums of those heady days of rampant profiteering. They are scarred by half-finished structures that were meant to be grand mansions, built by profiteers of that era. Now they are monstrosities that stick out like charred remains of a burnt-out war-zone, evidence of stunted ambition. The owners had run out of the cheap money they were used to getting.

But now, with a new window opening thanks to the #bondnotes and a potential printing frenzy on the horizon, they might be back in business again. As most Zimbabweans are asking, what will stop the RBZ from running the Fidelity Printers’ printing machines again, day in, day out, like they did before 2009? What’s there to stop them exceeding the so-called $200 million AFREXIM bank facility that is supposedly backing the #bondnotes? As long as they need the cash, what will stop them from printing every day and night of the year? The next election is less than two years away and the ruling party needs the money. It usually doles out freebies in the year or so prior to elections. But without access to US dollars, which it cannot print, its options were severely limited. Critics will argue that these #bondnotes will be used to oil the ZANU PF election machine – raise the much-needed cash while it can.

But if that is the case, it’s tantamount to a scorched earth policy, because printing more #bondnotes will not solve the fundamental problems at the heart of the Zimbabwean economy. On May Day, Vice President Emmerson Mnangagwa addressed a near-empty stadium in Harare. It was an embarrassing scenario but one that was a true reflection of the state of unemployment in the country. As most people commented, if there were too few people at the May Day rally, it was only right because there are too few people in decent employment in Zimbabwe at the moment. Printing more #bondnotes is no panacea to Zimbabwe’s economic challenges.

It’s hard to avoid the succession dimension in any analysis on Zimbabwe. Even if the introduction of #bondnotes is not faction-related, and there is no reason to imagine that it is, the window of opportunity that it presents will almost certainly create a stampede among the class of political elites, to harvest as much as possible from this window of opportunity. After all, whoever yields financial rewards from it will be better-positioned in the succession wars.

After the 2013 elections, as we contemplated what had just happened, feeling thoroughly cheated and deflated, the one thing that came to mind was what I referred to in a conversation as the “cost of electoral theft”. It was that in time the cheating that had taken place would prove costly for the “winners” because they had no plan. They had enjoyed the benefits of the relative economic stability of the GNU and fooled themselves that they could go it alone. Three years down the line, that cost is evident. The government has all the power, but it is completely clueless. That it has resorted to the old tactic of printing money, albeit surreptitiously so, under the agency of #bondnotes suggests it has clearly run out of ideas.

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See also:

The IMF Press statement


And a report from The Source, a Zimbabwe financial news-site: