A bond is a debt security, in which the authorised issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) or repay the principal at a later date, termed maturity.
Miners are sceptical that the financial instruments which were first introduced by the central bank two years ago may not mature in six months, prompting operational problems for the gold miners.
Reserve Bank governor Gideon Gono last month “rolled over” the bonds after it became apparent that the bank had failed to redeem the 2008 bonds which had a 12-month tenor and 8% coupon rate. The bank has already said “various other initiatives are being pursued to meet all outstanding obligations”. But analysts say failure by the bank to recapitalise since last year’s dollarisation of the economy could make repayment of the gold deliveries a tall order for the debt-ridden central bank.
Fidelity Printers and Refineries — a subsidiary of the Reserve Bank of Zimbabwe that was until last year mandated to buy gold from the miners owes gold miners an estimated US$30 million in gold deliveries. The central bank which last year admitted it misappropriated funds owed to non-governmental organisations and miners introduced the monetary instruments in a bid to raise capital.
Chamber of mines of Zimbabwe president, Victor Gapare this week told businessdigest that miners were struggling to trade the bonds.
“Gold producers have experienced challenges in trading these bonds,” Gapare said. “Most producers are holding on to the bonds at time when they are facing working capital constraints and are unable to convert these bonds into cash. It is difficult to see any changes to market conditions in the absence of major capital flows into the country.”
He said following the decision by the central bank to pay gold producers part of the debt in the now demonetised Zimbabwe dollar in 2008 a few miners “off-loaded” their bonds to third parties. He added that the aggregate amount owed to the industry by the central bank could be in excess of US$100 million.
Independent economist Eric Bloch says treasury should “immediately” accord prescribed-asset status to avoid the “tragic consequences” of non-redemption of the bonds.
“Merely as a transitional, very short-term alleviating measure, the Finance ministry should immediately accord the bonds prescribed asset status, rendering them a somewhat more attractive investment status for insurance companies, pension funds, and other relevant institutions,” Bloch said. This, he said would enhance tradability of the bonds, thereby improving gold producers access to desperately needed funds.
“The bonds should also be classified as acceptable instruments for settlement to Zimbabwe Revenue Authority of gold producers’ income tax, PAYE, VAT, withholding taxes, and other tax liabilities.
Every effort must be speedily taken by government to minimise the tragic consequences of the non-redemption by RBZ of the bonds when due.”
The Commissioner of Insurance and Provident Funds is on record informing insurance companies and pension funds to “brace themselves to invest in prescribed assets when government floats the requisite paper.”
Efforts to get comment from pension funds were fruitless but some industry players expressed concern that the liquidity problems on the market and the sector’s poor underwriting capacity would make it difficult for the bonds to be redeemed.