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Bond notes or bond paper?

John Maynard Keynes, one of the celebrated intellectual forces in economics thinking, once wrote: “Practical men who believe themselves to be quite exempt from intellectual influence are usually the slaves of some defunct economist.” His point: decisions on what interventions to make in an economy are founded on the ideas of economic thinkers, whether the implementers (practical men) are aware of it or not.

The Brett Chulu Column


Bond notes have been proposed by the Reserve Bank of Zimbabwe (RBZ) as a policy intervention to address the current cash shortages in Zimbabwe. A question is in order: does the concept of a bond note have a solid intellectual anchor?

It has been awfully difficult to meaningfully contribute to the debate on bond notes for a good reason. The concept of a bond note is not clear, at least to many Zimbabweans. From a formal research perspective, it is almost impossible to advance a field of knowledge when researchers are not agreed on the precise meaning of things they have observed. So the simple question: what is a bond note? It does not constitute a tinkering with the petty stuff. Neither is it an act of rabble-rousing.

Only when we come to a point where we have an unambiguous understanding of a concept can we meaningfully critique the merits of a policy intervention anchored on that very concept. One would naturally assume the idea of a bond has a context and precedent. In this case, context is monetary policy as nested within the financial sector.

Precedent, in this context, denotes the idea of a bond has been applied before in monetary policy. The stock of accumulated knowledge in finance and as specifically applied to monetary policy places a bond in the portfolio of instruments used to borrow money from financial markets by a nation’s Treasury. This portfolio of debt instruments is alternatively known simply as treasuries.

The underlying idea running through these borrowing instruments is that a lender agrees to sell his/her money to the borrower for a profit (interest), with the express understanding that after a stated period, the borrower will repay the money plus the cost of the money (interest). The time given to repay the money has been traditionally used as a basis to name these borrowing instruments. If the duration of repayment is less than a year, the instrument has been customarily known as a Treasury Bill. If the repayment period is between one and 10 years, the debt instrument has been conventionally known as a note. If the repayment period is beyond 10 years, the debt instrument has been known by the moniker bond. Based on this categorisation of treasuries, the term bond note becomes an oxymoron.

According to the bill-note-bond classification, a debt instrument is either a bond or a note, and not both. I doubt that the term bond note as has been proposed by our apex bank, RBZ, is drawing from this taxonomy. There is simply no way the central bank could make such a calamitous intellectual error — it’s just too basic a boo-boo to be committed by people whose chicken and rice are economics jargon. The only logical option we have as to the meaning of the term note as wedded to bond is that it is being used descriptively and not conceptually. Simply put, a bond note would purely be a paper version of the bond coin. We are then left with the question: what is a bond?

Investopedia defines a bond: “A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows funds for a defined period of time at a variable or fixed rate (parentheses are theirs).” This is the closest to as sensible a meaning of bond in our present context. Given this conceptual pillar, we can now begin to identify substantive issues surrounding the RBZ’s idea of bond notes. In this train of logic, we are led to conclude that the central bank is effectively borrowing money from the public at zero interest without stating when the loan will be paid back in full. In this context, the bank is no different from your friend — you don’t charge your friend interest when you lend them money. Your friend would normally say something like this: “Things are tight, I will pay you back your money when when(ever) I get it.”

Arguably, a debt instrument based on this lend-your-friend model would potentially represent a major financial innovation in monetary policy. This forced conclusion that a bond note is a new type of bond is far from being satisfactory.

Enter Afrexim Bank. Bond notes are said to be backed by a US$200 million loan from Afrexim Bank. As a central bank, if you inject this huge but borrowed amount into an economy that does not have its own currency, and where more foreign currency is getting out of the country than is coming in, how do you pay back if the loan is called?

Answer: bond notes — you can’t pay for your imports using bond notes. Bravo. That’s precisely the desired end point — localise circulation of this borrowed money. You get an advance from the citizens at zero cost and in exchange you give them a zero debt paper (not derogatory at all, treasuries are commonly known as paper) they can use to pay locally? You don’t want to be indebted twice for the same loan, do you? Afrexim has just sold you money. You wouldn’t want to buy the same money twice — it would be the case if bond notes were an interest-bearing debt paper (loan from the public).

Will the Afrexim loan be kept as reserves while its supposed surrogate (bond notes) circulates? If the Afrexim loan is kept as reserves, then no one can credibly accuse the apex bank of hoodwinking the nation into cleverly printing money. Suppose the Afrexim loan is locked away in the RBZ’s vaults for the duration of the loan period, then bond notes will technically have to be withdrawn from circulation when the loan is paid back. In that case the question of the bond notes being a debt paper without a maturity date falls away. In fact, the term bond becomes totally meaningless. In this case our central bank’s error would just be linguistic — failure to use an appropriate term.

In this scenario, then a bond note is not a debt paper. It is money, as we ordinarily know it, albeit not printed.

If both the Afrexim loan and its supposed stand-in (bond notes) are injected into the market, two scenarios are unavoidable. In a scenario in which bond notes are withdrawn when the Afrexim loan matures, then bond notes would in retrospect be zero debt paper issued to citizens. Then the use of the term bond would make absolute sense. If the bond notes are not withdrawn upon maturity of the Afrexim loan then, in retrospect, bond notes would be printed money backed by fiat (meaning authorities say, “we declare, this paper is money”). So the crux of the matter is not whether bond notes are money or not, but rather whether bond notes are borrowed or printed money.

Unfortunately, that can only be answered in the future when we see how the RBZ acts when the Afrexim loan matures. Sadly, there is always no data in the future. The RBZ can clear the air: will the Afrexim loan be vaulted as its surrogate circulates? Will the surrogate be de-circulated when the Afrexim loan matures?

“In the long run, we are all dead,” Keynes the economist once remarked.

Chulu is a management consultant and a classic grounded theory researcher. He has published research in an international peer reviewed academic journal. — brettchulu@consultant.com

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