There is nothing wrong with bond notes but …

The recent announcement by Reserve Bank of Zimbabwe governor John Mangudya of the impending launch of bond notes in October has been met with ferocious resistance. In my view, there should be nothing wrong with introducing the bond notes in the manner explained by Mangudya.

The notes or the currency will be backed by a line of US$200 million, according to the RBZ governor, who is a sharp contrast with his predecessor Gideon Gono. In history, currencies have always been backed by something more precious, especially gold. The famous gold standard which was abandoned in the 1970s is a good example.

Certainly, the bond notes will not be foreign currency; so what will they be? In my view they will be a Zimbabwean dollar. The economic fundamentals are not well-suited for the introduction of a local currency. Perhaps that could explain why the RBZ chief is trying to back the currency with US dollars.

The question, however, is: if there is US$200 million to back this currency, why not just inject the foreign currency into the system. The 5% incentive to be paid shows that the bond notes will exceed US$200 million. That being the case, the central bank must clarify how the 5% will be funded. It should also be noted that US$200 million falls far short of the liquidity requirements of the country, which could explain why people are cynical about the backing of or the idea behind bond notes.

The central bank must be advised that it is normal for people to prefer the US dollar given its economic status in the world economy. The real-time gross settlement (RTGS) platform is denominated in US dollars. It is strange how the economic ball moves.

In 2009, the then Minister of Finance Tendai Biti, sought the banking sector’s input on the need to go back onto the RTGS after the collapse of the Zimbabwe dollar. Government appeared to be inclined to use the rand, but bankers at the time made a strong case against it and government listened. The Bankers Association of Zimbabwe (Baz) sought the input of its affiliate association, the Treasurers Forum (I was part of this grouping), who made a strong case for the use of the US dollar. This is the decision which the country has lived by since and as the US dollar strengthened against most currencies, including the rand.

But our export competitiveness was affected dearly as a result. I supported the decision on the basis that the US dollar was less volatile compared to the rand and I believed that the multicurrency regime, dominated by the US dollar, was going to be transitory allowing the economy to be fixed before restoring the national currency. Sadly, this did not happen.

Faced with a cash shortage, the RBZ had to do something. They are a monetary authority. The prevailing cash shortage is not healthy for economic activity. It dampens investor confidence as well as the productivity mood. Of course, it is confusing that the central bank has been saying they are not trying to solve the cash crisis through the issue of bond notes. The problem with the announcement is the timing. Why did the central bank wait for there to be a shortage of cash to start talking about bond notes? The central bank employs learned researchers and economists, including the governor himself. His team should have forecasted a cash shortage and mulled a way foward.

Mangudya is suffering for the sins of his predecessor who ran RBZ like someone who had never read an economics textbook. Printing money recklessly destroyed public confidence in banks.

Mangudya may have good intentions, but the problem is the public does not trust the central bank since the Gono days. As part of restoring confidence, parliament must summon Gono to account. In short, he must answer why and how, as learned and experienced as he is, he printed a small non-convertible currency to such levels when he could have stopped at some point.

We are not like the US who can print US$1 trillion and still manage to escape a dent on their currency. This should include answering why he allowed Interfin Bank to go on curatorship for two and half years when it was clear after six months that the bank could not be saved, in the process destroying public confidence through destroying depositors’ value.

The currency backing, which Mangudya is trying to institute, is what we needed during the Zimbabwe dollar era when it became clear the currency was losing purchasing power at an alarming rate. Perhaps asking Gono to account is part of restoring confidence in the banking system just as the Zimbabwe Revenue Authority board has shown seriousness in running the tax affairs of the country by suspending Gershem Pasi.

The next broom should sweep over Marnet Mpofu who has failed to protect the interests of the pensioners at the Insurance and Pensions Commission. Mpofu is not responsive to the plight of pensioners and refuses to answer or respond to queries.

As a former bank treasurer, I have known that when a bank has no cash and they are funded, they order cash from the RBZ (even in the multicurrency regime). Where the central bank does not have the cash, banks would import the various currencies from South Africa, in the absence of surplus cash in the interbank market. This never takes more than three days. So when there is a cash shortage in banks, it points to a situation where there could either be a logistical bottleneck which should not last more than a few weeks or there is a serious systemic challenge, which shows that banks’ nostro accounts are not funded or the RTGS accounts are merely numerical balances.

To summarise, the interventions suggested by the RBZ chief show that there is a serious problem, especially as the RBZ boss says only four banks are facing a cash crisis. If it is only four banks, why then institute such serious measures?

According to him, the intention is to balance the basket of currencies so that it is not skewed towards the US dollar. It appears the RBZ would want the basket to reflect the 2009 weighting whereupon the US dollar and the rand were almost equally accepted. However, the euro and other currencies ratio would be propped up to 10%.

The economics in 2009 is different from that of 2016. In my experience as a bank treasurer, I noted that Zimbabweans resisted the euro, pula and the British pound from the onset preferring the US dollar and the rand instead. While the rand carried the day for a long time, its fortunes as an acceptable currency began to wane as the rand became more volatile sparking fears of a Zimbabwe dollar-style of collapse.

Perhaps, Mangudya is motivated by the success of the bond coins and so he believes the notes will succeed. It is likely to take more effort to achieve this. The coins were not accepted as such, but the rand coins were rejected.

Overall, it is the duty of the central bank to convince the public to accept a medium of exchange. An act of force never works in economics. Besides, as this is termed a bond, the value will depend on market perception. The resistance points out to the possibility that the bond notes will not hold a par value with the US dollar. As to what extent they will lose value remains to be seen and will depend on whether or not the market believes the notes are backed by a the US dollar or they are an air bubble.

Daniel Ngwira,Chartered Accountant, former bank treasurer and former university lecturer. — daniel.ngwira@gmail.com

3 thoughts on “There is nothing wrong with bond notes but …”

  1. TheGuyWithnoName says:

    Thats a huge but

  2. S.Munemo says:

    well said Mr Nhira

  3. Zvichapera says:

    I think this article has said something critical. While we lost money and life savings in the crisis up to 2009, what people should realise is that what was really lost was trust. Trust was lost completely and whatever this so called government will attempt to do through its partisan central bank will not work, until when that lost trust is restored. ZANU PF explicit and implicit behavior unfortunately can not help in restoring the much needed trust. This is this simple, but it requires turning upside down the values and systems infesting our country. It has to be our country and not Robert Mugabe and ZANU PF country. We are on self destruction. Wait and see. A partisan politburo or central committee endorsement is not good enough in this day of a globalized economics. People who have money have many options today and they will go for the best options and it is utter naive to think that Zimbabwe is offering those best options.

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