Bond notes: A litmus test

GOVERNMENT will at the end of October introduce the controversial bond notes in a bid to ease the current liquidity crunch and cash shortages amid scepticism and resistance from the market. The move will be a litmus test for the bond notes; it will measure their acceptability.

Zimbabwe Independent Comment

Bond notes are not real money, but a token currency which will circulate together with other major currencies being used within Zimbabwe, including the United States dollar, South Africa rand, Botswana pula, Pound Sterling, euro and others.

Reserve Bank of Zimbabwe governor John Mangudya yesterday tried to market allay fears and anxiety over the “surrogate” currency.

“The bond notes which will start to circulate by the end of October 2016 will be at par with the US$ (i.e one to one) and will be used and treated in the same manner as bond coins,” Mangudya said. “We anticipate that bond notes equivalent to around US$75 million will be in the market by the end of December 2016…it is also important to note that the bond notes shall not be forced on people who do not like them.”

Mangudya added: “The bank has heard and taken note of the public’s concerns, fear, anxiety and scepticism of bond notes which all boils down to the general lack of trust and confidence within the economy.

“The bank is addressing the concerns by planning to introduce smaller denominations of bond notes of US$2 and US$5. In addition, the bank has proposed for the setting up of an independent board to have an oversight over the issuance of bond notes in the economy…

“It is critical to emphasise that the introduction of bonds notes does not mark the return of the (now demonitised) Zimbabwe dollar through the back door. The macro-economic fundamentals or conditions for the return of the local currency are as follows: minimum foreign exchange reserves equivalent to one year import cover; balanced and sustainable government budget; sustainable interest rates; high consumer and business confidence; sustainable level of inflation; and a healthy job market.”

The bond notes will succeed or fail based on their convertibility, convenience, durability, divisibility, portability, acceptability, limited supply and uniformity — the characteristics of real money. Public trust, confidence and market reaction will be decisive.

At another level, since this measure is not an accident, it is an experiment of sorts. The bonds notes in a way have become an empirical test to arbitrate between competing models and hypotheses about money and credit. Of course, it can’t be like Ludwig von Mises’ great book The Theory of Money and Credit which remains the most spirited, thorough, and scientifically rigorous treatise on money — some say the best book on monetary theory ever written.

Critically, the market will remain jittery even if Mangudya did his best to allay its fears, given people’s 2008 hyperinflation experience. Government will continue to struggle with the chronic headache of how to deal with the deteriorating liquidity crunch and cash crisis despite the bond notes until it addresses its unsustainable current account deficit, massive revenue leakages and production in the economy.

6 thoughts on “Bond notes: A litmus test”

  1. mangundu says:

    How can someone fix the exchange rate of any currency against the US dollar to one as to one.Within two days ,it will be one as to 50.Where are financial advisers?This is the last nail you are hummering on the Zimbabwean coffin.

  2. karanda says:

    Who exactly Is expected to understand You. The bussiness people, ordinary people, economists, etc. We should only hear You , its toi early to understand You , because its unbealivable. These are notes. Monetary authourities are the ones who know miracles behind bond note introduction. What have You done to introduce papers That are équivalent to US$ on That rate. Explain in Our languages for us to understand

    1. Bere Gosho says:

      good question.How do we trust a government that can control their expenditure,biased solutions beneficial to just a few.
      Before the introduction of the BBond NNote could the Mangudya give us a brief of one of the things RBZ did to address fundamental problems the country went through that had come right with their stupid overnight decission.

  3. Kurai JoshuaTsododo says:

    No to bond notes.

  4. Kurai JoshuaTsododo says:

    There’s an alternative to bond notes. It’s for Mugabe and co to graciously leave office to allow others to take over. Rbz governor included. Haagoni.

  5. munyaradzi says:

    one fails to understand how the introduction of the bond notes will add value to the zimbabwean economy, apart from obviously expanding monetary supply thus fuelling inflation. if this process is honest and the government has set aside $75 m to back the bond coins, why cant that $75m be released to the economy in hard currency to alleviate the alleged shortage. honestly, the government cant expect us to understand that a shortage of cash can be solved by making paper a legal tender. so if next time i have no upfu i should just declare toilet paper as money and head to spar?money will be there if the government regains a modicum of sanity in economic and political management of zimbabwe.

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