Published On: Mon, Nov 14th, 2016

The reality about bond papers coming in notes!

The Reserve Bank of Zimbabwe say ‘Bond notes are not a surrogate Zimbabwe Dollar for they are not currency but a financial instrument issued at par with the US$. Bond notes will operate in the same manner as bond coins have been operating’. It is not a currency but a financial instrument, they say. A currency is defined as ‘a system of money in general use in a particular country’. I will leave you to make the judgement as to whether the bond ‘things’ are not in fact a currency as they are quoted in bond value, quoted at par with the US$.

What is clear is that the RBZ has done a very poor job of explaining the issue of bond notes. Legal experts contend that the issuance of this ‘fictitious’ currency is unlawful. This has been corrected by Statutory Instrument 133 of 2016 which provides a legal framework for the bond notes as acceptable legal tender. Again, note that this was through the Presidential Powers (Temporary Measures) Amendment of the Reserve Bank of Zimbabwe Act. I am not a legal expert but what seems to be apparent is that these laws are being promulgated to legitimise something that is clearly illegitimate. ZANU PF politicians have come out in full force to support the ‘noble’ idea of the bond notes. The messages are very different, maybe illustrating how much the bond notes issue is understood by the intended users.

Buhera South MP Joseph Chinotimba has a video circulating on social media where, in a language similar to English, he explained that bond notes were to provide change and hence their introduction will not cause inflation. Someone has forgotten to tell him the reason for introducing the bond notes. The Vice President of Zimbabwe, Honourable Emmerson D Mnangagwa is quoted saying ‘The US dollar is a reserve currency. It is a precious currency to most countries. It’s for international transactions, Haisi yekutengesa matohwe, yekutengesa mavisi, yekutengesa madora kana kutengesa mazhanje kana kutengesa madomasi kuMbare. This is only found in Zimbabwe. Ndobasa rebond note iroro.’ Please note this guy is a lawyer.

The Zimbabwean economy has collapsed.

Facts on the ground point to a bleak situation where more than 90% of collected revenue is channelled towards the ever-increasing government leaving little to nothing for important things like capital expenditures like roads, airports, rail and other essential capital developments that attract foreign investment. Improvements in revenue collection are going to remain a distant dream because the tax base is shrinking along with the shrinking industry and manufacturing base. The government has resorted to issuing Treasury Bills (TBs), through the RBZ, to fund government expenditure. Upon maturity, the government is unable to pay these bills, resorting to roll overs. This is resulting in unprecedented government debt which is squeezing the private sector in the borrowing market. Please refer to the Mid-term Fiscal Policy Review Statement and not that Finance Minister Patrick Chinamasa talks on funding the budget deficit through Treasury bills and how incapacity has seen increasing roll-overs.

Please see below the increasing government position with the central bank;

By June they were $726m US in the red. By the time of writing this little piece and probably reacting to the impending issues of the infamous bond notes which rumour says the Chinese printers have millions of counterfeit notes waiting to flood the market, this position is most likely over $1billion plus.

While the RBZ says that bond notes are for export incentives, a claim I find hard to believe in a country that is a net importer, I view this move as an attempt by a desperate government to find another source of revenue for their spiralling spending through printing money. In their minds, with all other things remaining equal, they print $200m worth of bond notes, most likely more, and they siphon depositor funds to fund their luxuries and depositors will get the bond paper, sorry, notes. In real life, ceteris paribus only works in economic theory, the legislated bond value will not hold in an economy where public trust is absent and where authorities are known thieves and liars.

A look at the commercial bank holdings brings an interesting link to the $200 bond notes value. A graph from the Reserve Bank shows that the average commercial banks holdings from June 2015 to June 2016 averages $200m. This brings the very idea why the $200m figure was decided on. The attempt is to print what depositors have in the banks.

See graph below for average commercial banks holdings;

In my opinion, this move will cause more damage than good. The learned Governor of the RBZ and the Finance Minister have not taken into account the unintended effects of the bond notes in an environment tainted by past and present lies. People are going into panic withdrawal of cash from the banks, opting instead to bank under their pillows. Those earning US$ will not be banking them as they see through this money raising scheme. A monetary parallel market is going to emerge and the value of the US$ will be determined by the forces of supply and demand and since there will be shortage of US$s, we need to brace ourselves for a very high US$ value while the bond notes value will plummet.

Since the US$ is the currency needed and accepted in international trading and since Zimbabwe is a net importer, the expensively acquired US$ will result in expensive imports. The expensive imports and the general shortage of fuel will lead to general shortages, constantly increasing prices and the government will jump in and control prices and leading to more shortages.

Munya Mugari

Democratic Assembly for Restoration and Empowerment (DARE)

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