HomeAnalysisMarket anxiety over bond notes

Market anxiety over bond notes

RESERVE Bank of Zimbabwe governor John Mangudya found himself in a tight spot last week and was forced, for the umpteenth time, to defend his decision to introduce bond notes.


In yet another stark reminder that the public lacks trust and confidence in the surrogate currency, Mangudya was bombarded with questions from the audience after presenting his mid-year monetary policy statement.

Critics equate the bond notes to the now defunct Zimbabwean dollar, evoking nightmares of the 2008 hyperinflation and economic ruin.

The move is also viewed as government’s attempt to print local currency via the backdoor and fund its ballooning civil service wage bill currently gobbling about 97% of the US$4 billion cash budget and expected to cause a US$1 billion budget deficit by December.

Mangudya — who in May this year announced the country would unveil bond notes backed by a US$200 million bond from Afreximbank, whose value would be at par with the US dollar in order to ease cash shortages and stimulate exports — has been at pains to defend the decision amid widespread scepticism and resistance that has culminated in protests.

The central bank chief said the bond notes will come into circulation by end of October with about US$75 million expected to be in the system by year-end at the current rate of exports. The bond notes will be given as an incentive to exporters. 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.

The US$75 million represents a mere 1,25% of money supply which is about US$6 billion, excluding money in circulation which is estimated at US$4 billion, according to Mangudya.

As soon as Mangudya announced plans to introduce the bond notes, the market went into a panic mode over the decision with millions of dollars in cash leaving the formal banking system through a run on banks. This added to billions circulating outside the formal banking channels due to a lack of confidence which saw about 70% of Zimbabweans as of 2014, according to a FinScope consumer survey, preferring to keep their cash at home.

Business convened a financial services sector indaba dubbed Financial Markets Indaba which rejected the controversial plan.

The event, attended by executives from the financial services sector as well as top industrialists, unanimously voted against introduction of the bond notes during a poll initiated by top banker Nigel Chanakira.

“If the bond notes are 3% of the monetary circulation, why go through all this trouble? Give us something else besides the bond notes. The market does not want them so if the Reserve Bank governor is a listening man, as he has said, please remove the bond notes,” Chanakira said after the poll.

Mangudya last week struggled to allay fears the introduction of bond notes was tantamount to smuggling the now defunct Zimbabwe dollar into circulation.

“The bond notes which will start to circulate by the end of October 2016 will be at par with the US dollar and will be used and treated in the same manner as bond coins. 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 said.

“The bank has heard and taken note of the public’s concerns, fear, anxiety and skepticism 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…”

He said it was critical to emphasise that the introduction of bond notes did 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,” he said.

Mangudya’s remarks at the mid-year monetary policy briefing are clear testimony of the extent to which the market is sceptical to the planned introduction of the bond notes.

He recently also said government would increase money supply to the market in United States dollar terms when it introduces bond notes in October in order to neutralise public resistance.

Mangudya said Zimbabwe imports between US$10 million and US$15 million per week. Most of the money finds its way out of formal circulation, he said.

Economic analyst Evonia Muzondo said introduction of the bond notes, currently suffering a crisis of confidence owing to fears of a potential repeat of the excessive money printing that led to hyperinflation several years ago, could also see inflation rising and result in shortages of basic commodities that are mostly imported.

“If the bond notes are printed in excess, it could lead to inflation based on a simple economics rule which states that if more money is printed than money supply can handle, the value will go down,” said Muzondo.

“It seems people are not convinced that the RBZ will not print more of what they have promised because of legacy issues.”

Although Mangudya allayed fears the central bank will not print more than the US$200 million by introducing a monitoring committee, Muzondo said the market has no confidence in government committees whose record has generally been poor.

She said Zimbabweans also fear that the bond notes will not hold US dollar value as they are likely to be seen as a new version of the moribund Zimbabwe dollar.

“These perceptions will likely fuel a parallel market. Money is all about trust and, if one does not believe in a certain currency, they will not accept it, or will accept it at a huge discount. In this scenario, there is high scepticism over the bond notes,” said Muzondo. “The bond notes are not useful for purchasing imported goods. One has to pay for those with US dollars, rand or other foreign currency and if one fails to get the foreign currency at the banks that is where the problem will start. Most of our products and raw materials are imported; this will likely affect the import of essentials as well as retailers’ ability to replenish stock, which could lead to shortages.”

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