By Againstprof Makuyana
The government has announced that it is set to introduce Z $ 200 million of Bond notes to ” ease liquidity crises “. The Bond notes will be issued by the RBZ in the next coming days.
I think this is a time we need to look each other in the eyes and tell each other the truth . We can’t sugarcoat things as normal yet they don’t represent anything .
Nomatter the arguments raised by the RBZ that this is not bringing Zim Dollar , that is completely false . How do you argue that you are not bringing Zim dollar when you issue notes to the tune of Z $200 million ?
At the end of 2014 l wrote an article supporting the necessity of the Bond coins and in my argument l stated that the Bond coins of about Z $50 million couldn’t influence the inflation rate and at the time couldn’t amount to the “re – introduction of the Zim dollar ” .
The argument was based on the fact that we still at the time had some considerable amount of USD in circulation and after all Bond coins represented 1 % of the purchase or transaction volume (if you buy goods worth USD 80.60 from USD100 you would still get your USD 10 plus USd4 and then only the change of 40 cents would be Bond coins ).
So that was tiny to affect inflation . Things have now changed . We don’t have the USD in our circulation , the RBZ has no such .
How the RBZ intends to fix the Bond notes to the USD at a rate of one as to one is something that has no economic reasoning and its unsustainable. How can a country fix it’s currency against another when it doesn’t have sufficient USD reserves to cushion any shortages that can appreciate the usd Dollars ?? China is able to Fix it’s Yuan against the Dollar because they have more than sufficient usd to do so .
We have decided to issue Bond notes “because we are experiencing liquidity crises /Usd crises ” . So how are we going to fix the exchange rate of Bond notes at a very difficult exchange rate against USD rate of 1:1 without any USD reserves ?? I will come back to the Importance of Usd reserves especially to an import reliant country like Zim later .
For now let’s look into the introduction of the Bond notes in detail . The RBZ will issue Bond notes of 5 , 10 , 20 and lend them to commercial Banks at repo rates .
ONLY commercial Banks will be able to transact the Bond notes with individuals and corporations.. For example Mr X is a civil servant ; he will be able to withdraw his Salary from CBZ and to his surprise , this month his salary will be Z $400 (and it’s said to be denoted as Z $400 bond notes which will mysteriously be forced to be equal to USD 400 ) and so Mr X will be able to purchase goods worthy USD 400 in shops !!! Is it that simple ???
No no its never gonna be that simple . Economics will harshly Judge the Reserve Bank Governor Mangudya for attempting to cheat the system. There is no way a Zim dollar (forget about the wording that it’s not Zim dollar because it has no meaning ) can be fixed against the USD without USD reserves.
Take a simple look at how the disparity will come back to cause problems . Zimbabwe is an import reliant nation. Companies and sole traders buy their stock from abroad and sell in Zim . We don’t have production activities taking place in Zim . This leaves traders like my friend Nomathemba Primrose Ndebele in precarious situation .
She will have to sell her goods in Bond notes and then go to the Bank (which already doesn’t have usd or fir those Banks that will still miraculously have the few USD , have already introduced daily maximum withdrawals ) to offload the Bond Notes and get the Usd so that she can go and buy stock abroad. This is where the USd reserves l spoke about where suppose to help .
Two scenarios will eventually occur ;
1) The fact that the Bond note is not a recognised currency outside Zim , puts pressure on individuals and corporations who wants to import to get the USD by exchanging with their Bond notes . This means long lines and waiting periods at Banks coupled with nepotism and corruption . In fact as more and more USD leave the country , this will make the trade of USD a lucrative Business . Money changers (vakomana veForex ) and their Black market will come back.
2) As the USD reserves continue to dry up both at RBZ level and Commercial Bank level , this will force the RBZ to keep on printing the Bond Notes ” to ease liquidity crises ” . The RBZ will continue to hide behind “easing liquidity ” in printing the Bond notes , when in actual fact there is no more USD to talk of and before the end of this year , the Bond Note will virtually replace the Usd , the USD will no longer be on the market (this is exactly how the Bond coin replaced the five rand coin , R2 and R1 ) .
I remember when l was in Zim l struggled to Change my Bond coins to rand coins when l was about to go back to SA . Nobody had the Rand anymore . The rand coins had been virtually left the country to sa.
The above two scenarios will occur concurrently at an unprecedented rate to such an extent that by March 2017 we will be talking of a serious USD dollar crises. At that time keeping the USD TO bond note at 1:1 will become virtually Impossible . The depreciation of the Bond note will become inevitable. There Is no way l would accept to give away my USD $100 for Z $100 knowing fully well that l will struggle to get back my USD because the banks don’t have it . Forex trading will now be purely confined to the Black market .
You will have to give me a premium for me to give you my USD 100 . In other words for me to give you USD100 you will have to go give me Z $130 Bond notes or precisely 100 dollar Bond note will be equivalent to USD 80 !!! Once the exchange slip out of the 1 as to 1 ratio it will automatically become become a free fall and the reserve Bank can’t do anything because already they don’t have the USD reserves to cushion the market .
The argument that we are backing the Z $ 200 million Bond notes against a USD 200 loan from China is a complete fabrication . If indeed we have a loan from China why not just bring that USD 200 loan facility Into circulation without necessarily hiding behind the Bond notes?
Hiding will never get us anywhere as long as the loan is not delivered we will still be faced with a USD shortage shortage and shortage and the usd shortage will creates a depreciation of the Bond notes. Furthermore no one still trust the RBZ not even those who support Zanu pf. As we speak they are busy amassing their USDs from Banks and keeping them under their mattresses .
A more serious but rather ignored consequence will kick in the moment USD 100 is no longer equivalent to 100 dollar Bond notes . Let’s not forget that the USD is currently the most appreciating currency in the whole World . To that regard it’s no longer just a medium of exchange but more of a “store of value ” .
Everyone wants the usd just to benefit from It’s appreciation . Will this be the case with the Bond note ??? Surely not, no one wants to hold a currency that can’t be traded outside the country, a currency that becomes zero the moment one leave beitbridge or Plumtree . Making that currency equal to the usd is absurd . One serious consequence of this is inflation .
The moment a disparity (either speculative or perceptive ) exist between a USD 100 and Z $100 Bond notes , then shops will no longer be selling clothes worthy USD100 for 100 Bond notes . Customers will be discriminated . Those who buy In USDs will continue to pay the original price but those who want to pay in Bond notes will have to “pay the Bond notes that are equivalent to USD100 on the Black market ” .
Why should l sell you a microwave at 100 Bond notes but when l now want to change the Bond notes into USD so that I can go and buy another stock in sa or Dubai , l will have to change the 100 Bond notes you gave me to a mere USD 10 ?? In fact every morning shops and companies will have to first check with the forex guys “what’s the rate ” before accepting the Bond notes.
Once Inflation set in motion it will be very difficult to curb. My serious concern is we are going for elections In one and half years from now . I hope this RBZ decision will not backfire just before the election because we will end up with a 2007 /8 scenarios and zanu pf will have a lot to answer in 2018 elections . Surely the exchange rate will be USD 100 to Z $100 000 Bond notes by 2018 !!!
- Againstprof Makuyana is an economist, a chartered accountant, auditor and social commentator for Khuluma Afrika. He is one of Zimbabwe’s sober voices. You can follow him on Facebook here