HomeLocal NewsLegality of bond notes questioned

Legality of bond notes questioned

AS the Reserve Bank of Zimbabwe (RBZ) prepares to launch bond notes which have unnerved the market, questions are swirling over the legality of the surrogate currency and the lack of a term sheet for the US$200 million African Export and Import Bank (Afreximbank) facility.

By Bernard Mpofu

Zimbabwe is in the grip of a serious cash crunch, which has worsened gradually since the country abandoned its currency in 2009 for a basket of international currencies dominated by the United States dollar.

In May, the RBZ announced it would introduce bond notes as a 5% incentive to exporters. The apex bank said the incentive would be discontinued once exports reach the US$6 billion mark from US$1,125bn for the six months to June.

But the news received an adverse response from the market which said the new notes were part of a ploy by government to introduce the discarded Zimbabwe dollar which became worthless due to runaway inflation and low foreign currency reserves.

Government sources told the Zimbabwe Independent that there is no term sheet between the RBZ and Afreximbank on the US$200m facility backing the bond notes, raising eyebrows over the monetary issue.

“The term sheet of the US$200m is unknown to the public and that ordinarily raises a lot of questions on such a facility. The salient features such as the tenure and how the regional bank will benefit from this facility has largely been shrouded in secrecy,” a source said. “What role did parliament play in this? All these questions beg for answers, given the quantum involved.”

A term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.

Afreximbank regional manager for Southern Africa, Gift Simwaka, declined to comment on the facility, referring questions to the RBZ.

Suspicion over the facility has been heightened by the fact the regional bank has not posted on its website anything on the US$200m export facility, raising questions on its transparency. Tellingly, other loans extended to Zimbabwean institutions by the Cairo-based bank are openly listed.

According to the regional bank’s website, one of the most recent facilities Afreximbank has with Zimbabwe is the Afreximbank Trade Debt-backed Securities (Aftrades) signed in 2014. The bank has also extended a facility to the private sector in Zimbabwe.

Aftrades is a US$100m facility and associated instruments aimed at alleviating the liquidity challenges confronting the financial sector in Zimbabwe.

In August 2014, Afreximbank agreed a US$150m financing facility for Econet Wireless Global Limited, Mauritius, to enable the telecoms company fund its expansion programme.

RBZ governor John Mangudya, who is currently in the US for the International Monetary Fund annual meetings, also declined to comment.

“… That information is not for public consumption. How do those questions help anyone?” Mangudya said in a text message when asked on the terms of the facility.

When told that the Independent can ask questions on behalf of the public, the central bank chief said: “Yes, but you are not bound to answer all questions which do not add value or which are derogatory.”

AfrAsia Holdings, the parent company of the now defunct local bank AfrAsiaKingdom, also signed a term sheet for US$10 million with Afreximbank in January 2014.

Pro-democracy activists have approached the RBZ, querying the timing of the bond notes and the legal implications of the facility which was not ratified by parliament. Protests have been held in the capital over bond notes with bankers saying the government should opt for the use of the rand instead of bond notes.

In June, lawyer of #ThisFlag movement Fadzai Mahere took the RBZ governor to task over the legality of bond notes.

She cited Section 68 of the constitution which states that every person has the right to administrative justice
“Dr Mangudya is part of the government. His office is created under Section 14 of the Reserve Bank Act and is subject to Section 68. In other words, he owes us an obligation of lawful conduct, reasonable conduct, conduct that is procedurally fair and substantively fair,” she said in June.

“Fair is huge criteria. Is it fair to take my money and give me paper in return? It is obvious that his conduct in proposing to do so is unconstitutional. Nowhere in the Reserve Bank Act is the power given to the Reserve Bank governor to issue bond notes. In fact, bond notes are a creation of the governor.”

Mangudya told bankers and journalists that lower denominations of bond notes will be introduced next month, adding that the notes would not have any inflationary impact on the economy, but are meant to incentivise exporters and curb money laundering.

“The bond notes which will start to circulate by 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,” he said.

“At the rate which the country is exporting and based on statistics, we anticipate that bond notes equivalent around US$75m will be in the market by the end of December 2016.

“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 the setting up of an independent board to have an oversight role on the issuance of bond notes in the economy.”

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