When Reserve Bank of Zimbabwe mooted the idea of a promissory bond currency in May, it was a hard sell.
By Taurai Mangudhla
It was akin to selling tissue paper to people holding diamonds and making them believe the value was the same.
More so, the pitch proved a tough one given the troubled country’s recent currency history.
In 2009, President Robert Mugabe was to adopt multi-currencies in a bid to end a hyperinflation charecterised by a free-falling local currency and fast prices of goods.
Central bank governor John Mangudya’s project suffered a confidence crisis at inception.
And when the bond notes were eventually introduced into circulation in November, the currency remains dogged by lack of confidence among Zimbabweans.
At the height of hyperinflation in 2008, shops and individuals had started pricing their goods and services in foreign currency to preserve value.
According to research by applied economics professor Steve Hanke, Zimbabwe’s official inflation figure for February 2008 stood at 165 000% year-on-year and by June 2008 it was unofficially estimated at about 2,5 million%.
Hanke said the Zimbabwe dollar lost more than 99,9% of its value against the US dollar between June 2007 and June 2008 as hyperinflation destroyed the economy.
“Between 1997 and 2007, cumulative inflation was nearly 3,8 billion %, while living standards fell by 38%. The source of Zimbabwe’s hyperinflation is the Reserve Bank of Zimbabwe’s money machine,” read part of Hanke’s research.
From 2007, retailers and individuals were fined for pricing goods in foreign currency. Yet despite these harsh attempts to stop use of foreign currency, a black market for foreign currency was thriving based on mutual understanding between buyer and seller.
By early 2009, the economy had plummeted, naturally forcing Mugabe’s government to form an inclusive government with his archrival Morgan Tsvangirai and his MDC and at the same time formally accept a multiple currency that had been born out of necessity.
On introduction of the multiple currency system, trillions and quintillions in Zimbabwean dollars became worthless overnight, effectively wiping out people’s life savings, corporate savings and insurance policies.
The inclusive government, coupled with a multiple currency regime that is largely dominated by the strong United States dollar, ushered in a new ray of hope and stability in the economy.
Civil servants were the first to get their salaries in vouchers of about US$100 that were to be redeemed at retail shops for groceries as government had no physical cash to pay its bloated workforce.
The situation was to improve with the availability of cash and goods that had vanished from the shelves during the Zimbabwe dollar era, given that companies shut down as they failed to retool or import raw materials while retailers had no foreign currency to pay for imports, started filling the shelves once again. Businesses from across the region and the world targeted Zimbabwe because of the hard currency to a point the economy kept ticking after the collapse of the inclusive government although there has been huge capital flight since then, signifying a lack of confidence in Mugabe’s rule.
A liquidity crunch that emanates from lack of fresh capital as foreign investors fret over Indigenisation and a general lack of policy consistence took a toll and was by November 2015 to culminate into a deep cash crisis that has worsened by the day.
In November 2015, depositors could withdraw US$3 000 at ATMs and a maximum of US$10 0000 per day from banking halls, but this has dwindled to as little as US$20 per day subject to availability of cash.
In May 2016, Mangudya announced plans to introduce bond notes, backed by a US$200 million Afreximbank facility, to act as both an export incentive and address the cash crisis. Like the bond coins, which were already in circulation, the notes would trade at par with the United States dollar.
Introduction of a local currency, by any name or means, sparked fears government was to smuggle back into circulation the defunct Zimbabwe dollar. Nightmares of hyperinflation and memories of food shortages haunted citizens whose suffering was still fresh in their minds.
For six months, citizens attempted to block the introduction of the surrogate currency through protests and lawsuits challenging the legality of the bond notes as well as the process used to introduce them.
Despite the spirited attempts, Mugabe used his presidential powers to introduce them through a statutory instrument.
On Monday November 28, bond notes started circulating before citizens even knew the designs and security features of the new currency.
Mangudya ambushed Zimbabweans to introduce a denomination of $1 in coins. Previously he had mooted introducing denominations of $2, $5, $10 and $20 but had been forced to lower them down to $2 and $5 which are in the change category. The decision to introduce lower denominations of bond notes was premised on fears the new currency could cause inflation.
Mangudya has so far introduced the $1 coins and $2 notes that have a value of $29million as at mid-December.
On the first day of circulation, teething problems hampered transactions with some service providers refusing to accept the notes which they were not familiar with.
The situation has improved with both formal and informal business accepting the surrogate currency as legal tender.
However, due to the general lack of confidence in the currency and its value will crumble much in the same way the Zimbabwe dollar tumbled against foreign currencies. Bond notes are not being kept for future transactions but used to transact immediately.
“I have accepted them yes, but who knows what will happen, maybe they will lose value,” a vendor along Glenara Road, who requested not to be named, said.
Although citizens have embraced the bond notes for transactional purposes, given the prevailing cash crisis, they keep a keen eye on developments around the surrogate currency. Each day, they worry about how much bond notes are in circulation and whether the rate remains at par with the US dollar.
Hanke told the Zimbabwe Independent recently bond notes were a recipe for disaster.