In May this year, the Reserve Bank of Zimbabwe (RBZ) announced the introduction of an economic stimulus in the form of a 5% incentive to exporters backed by a US$200 million African Export and Import Bank (Afreximbank) facility. The incentive would be given to exporters in the form of bond notes. The bond notes would be issued at par value with the United States dollar. The aggregate value of the notes to be issued would not exceed the value of the Afreximbank facility.
The bond notes, as announced by the central bank, will not directly restore to it any money creation powers lost through dollarisation beyond the expected incremental exports that will be generated if the export incentive works.
Therefore, whether lawful or not, the bond notes, structurally, cannot be the solution to the liquidity trap that we are in. Apart from the value being too little, the money creation powers they will give to the Reserve Bank and the banks will be limited to the underlying facility of US$200 million and perhaps some multiplier factor that has not been disclosed.
However, the statements attributed to President Robert Mugabe in June suggested that the bond notes were intended to be more than just an export incentive.
Said Mugabe : “We think those opposing them (bond notes) are really either politically doing so or doing so out of ignorance, but we know it can work. So the issue of bond notes should be explained to our people, all the more so against disinformation which is being mounted by the opposition.
“We will have bond notes backed by an amount of US$200 million secured from one of our generous banks, an African bank. So this generous African bank knows about the plan. They support it and we hope when the bond notes will come like they will certainly prove to be the cure to the challenges we have, but of course, the best cure is that we have our own currency in due course.
“As our reserves grow, so will the population of bond notes, all to ensure, a one-to-one correspondence between bond notes in circulation and US dollar notes we hold in our reserves.
“The idea is to stop those crooks who were taking advantage of the availability of the US dollar in the market to spirit away. They will now have to deal in bond notes as a ‘surrogate’ currency to the US currency we hold in our vaults. The intervention is thus well-meant and calculated to protect our foreign currency earnings.”
From the above speech, we can deduce that:
Bond notes will certainly come;
They are intended to be a form of a currency, though “surrogate”;
The actual local currency will not come now;
The circulation of bond notes is intended to go beyond exporters. It is intended to be wider;
The bond notes will mirror real US dollar currency reserves held in vault by the RBZ. The money creation power of the apex bank will be thus limited; and
The rationale is not only to provide an export incentive, but to also prevent the externalisation of US dollars by leading the US dollars from circulation to the RBZ vaults, while releasing bond notes to take the place of the greenback. Thus, the transacting public will have bond notes only, while the Reserve Bank will have the US dollar.
Clearly, this bond note plan will not restore full authority over monetary policy to the RBZ. It is not the kind of solution that will ensure that there is adequate liquidity to account for any growth in wealth creation. No details were provided whether or not:
a holder of the bond notes would be able to redeem them for cash at any stage;
there is any intention to drawdown on the US$200 million facility at any stage to meet the maturity of the bond notes;
the bond notes have a future maturity date or they are demand instruments; and
if the notes are not redeemable at all, is the facility a mere confidence enhancer that will signify the endorsement of the bond note by a credible third party, the Afreximbank?
All these questions should have been answered by now.
The law on the issue of bond notes
I respectfully submit that there is adequate legal provision for the bond notes to be issued lawfully without the need to enact any new laws.
The RBZ is established under the Reserve Bank of Zimbabwe Act, (Chapter 22:15). The functions of the bank are listed under Section 6 of the RBZ Act. The functions include acting, “as banker and financial advisor to, and fiscal agent of, the state”. Section 8 of the Act reinforces this relationship between the RBZ and the state.
Section 7(1)(n) of the Act grants the central bank the powers to borrow foreign currency outside Zimbabwe, but only on behalf of the state, and not on its own account. In the premises, it is safe to assume that the US$200 million Afreximbank facility that is intended to be used to back the bond notes will be a facility that the RBZ will conclude on behalf of the state, and not on its own behalf. Where the government enters into an agreement to borrow money, Section 300(3) of the constitution requires the Minister of Finance to cause the terms of the loan agreement to be published in the Gazette within 60 days after the conclusion of the loan agreement.
The terms of this section are peremptory. If the terms of the Afreximbank facility were not published as required by the constitution, the loan agreement would be invalid. But this invalidity can be cured by the conclusion of a new agreement whose terms would be published on time as required by the constitution.
Both the words, “bond” and “note” have legal signification. The businessdictionary.com defines a bond as a “written promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition”. A note is defined in Section 2 of the Bills of Exchange Act (Chapter 14:02) as a “promissory note”.
Section 89(1) of the same Act defines a promissory note as “an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person, or to bearer”. It follows that a note must be an:
promise to pay;
a sum certain in money;
on demand or at a fixed or determinable future date;
made in writing;
by one person to another;
signed by the maker; and
to, or to the order of a specified person or to bearer.
All notes can qualify as bonds, but not all bonds can qualify as notes. Whereas a note has to be unconditional, the promise on the bond can be conditional. A bond note therefore, in my submission, is a bond that meets all the requirements of a promissory note. While a bond can be conditional, a bond note has to be unconditional.
The Minister of Finance is authorised to borrow money on behalf of the state through the issue of bonds in terms of Section 13(3) of the Public Debt Management Act (Chapter 22:21). Therefore, bonds that meet the requirements of a promissory note (bond notes) can be issued out of Treasury directly, or by the RBZ qua banker to the state in terms of Section 13(3) of the Public Debt Management Act.
Except in exceptional circumstances approved by the House of Assembly, the minister’s borrowing powers are limited by Section 11 of the Public Debt Management Act to an amount fixed by parliament, which amount shall not exceed 70% of the Gross Domestic Product at the end of the year. As long as he will be within his limit, the minister will be entitled to borrow. I do not know if there is a resolution of the House of Assembly that fixes the maximum amount that the minister may borrow. Such a resolution is a pre-requisite.
A bond note cannot be legal tender
A bond note is not a banknote. A banknote is issued by the central bank in terms of Section 40 of the RBZ Act, (Chapter 22:15). The president, in terms of Section 40(2) of the RBZ Act, determines the denominations of banknotes, the design, form, or material to be used in making banknotes.
In terms of Section 40(3) of the RBZ Act, the Minister of Finance shall publish a statutory instrument specifying the matters determined by the president in respect of the banknotes. In terms of Section 41 of the RBZ Act, a banknote, which has not been demonetised, shall be legal tender of the amount expressed in the note.
When a note is legal tender, the law compels its acceptance. A supplier of goods or services cannot reject it. There will be legal consequences for the rejection. However, the law is not the only means at the disposal of the central bank to compel acceptance of paper that it issues. Acceptance can be compelled by moral suasion, cajoling or by economic imperatives.
Bond coins are not legal tender. However, they have been accepted for use in the settlement of obligations, especially the small denomination obligations. Their acceptance was a combination of moral suasion, cajoling and economic imperatives, including incentives. Before bond coins were introduced, rand coins were in general use to provide small denominations of currency. But banks were cajoled into accepting deposits in bonds coins. They were also given an incentive in that the RBZ shared in the cost of transporting the bond coins across the country.
The transacting public was also in desperate need of change while banks were reluctant to accept the deposit of rand coins due to the cost involved in transporting them. The bond coin thus became accepted as a natural substitute for the rand coins. Thus, although rand coins are legal tender, they are no longer in use, while bond coins, which are not legal tender, are generally accepted and used.
The mastery exhibited by the RBZ and the Ministry of Finance in introducing bond coins and making them generally acceptable, and in introducing some fiat-based electronic dollars that are not backed by United States dollars in cash or in nostro accounts, is a sharp contrast to the rigidity and arrogance behind the bond notes idea.
I submit that bond notes, though lawful, are not necessary. What they have done is to blow the cover under which the central bank and commercial banks have been creating money. Creating money is a somewhat legitimate duty that monetary policy demands of them. What the RBZ needed to do was to manage the transition from a cash culture to an electronic money culture. They also needed to manage the shortage of nostro account balances with which to fund imports and the payment of any repatriation rights and any other foreign obligations whether on the capital account or on the current account.
The fighting over bond notes is misguided and unnecessary. It is fuelled by the arrogance of those pushing for them and the ignorance of those fighting against them. There is no winner in this fight. Any day longer in this liquidity trap means another company is collapsing and the suffering of innocent people is prolonged. The arrogant must be humbled and the ignorant must be educated.
Nyambirai is a seasoned commercial law expert. This article was extracted from the 2016 Zimbabwe Independent Banks & Banking Survey.