BOND NOTES COULD WORK OR FAIL MISERABLY
Terrence T Mutonhori
The government has said it crafting a law to support the introduction of bond notes. If government wants bond notes to succeed it has to accept that it cannot impose these notes. The only party that should be forced to accept bond notes should be government agencies (tax authority, toll gates, local authorities, fines etc).
The fundamental problem haunting bond notes is the shortage of USD cash which is extremely valuable in a country where everything is imported. If you force traders to accept bond notes at 1:1 with the dollar those traders will simply stop trading because they will need to buy USD at a premium (10% currently for RTGS dollars).
It will no longer make sense to trade. This is what will create shortages. Alternatively, you’ll see some pretty wild inflation as traders pad their prices to allow for the margin they will pay for USD cash on the black market so they can continue to import. So a retailer will sell a can of beans for $3 assuming you’ll pay in bond and he’ll use that $3 to buy $1 USD cash to allow him to import again. Parallel pricing? Perhaps. If government cracks down history has taught us some good lessons on what will happen. If it was the case that there is enough USD cash in the system then you could legislate to force traders to accept bond notes. This is simply not the case as evidenced by the problems ZESA is facing in settling its obligations to SA.
I am certain bond notes can have their place in improving liquidity in the country but government must accept that their value, to business, as long as there is a USD cash shortage, will not be 1:1. There will be a premium on USD cash and that premium will be the exchange rate. Bond notes certainly have a value given that government accepts them in the settlement of taxes. The powers that be should simply be brave enough to allow the market to decide the value. If they are printing just $200m as they promise then that market value will not be bad at all. If government forces the 1:1 issue without solving the USD cash shortage it will have given the bond notes a kiss of death, they will be doomed to fail.