“…it is grossly irrational for President Mugabe to decree an exchange rate of 1 is to 1 between the bond note and the US dollar.”
Zimbabwe President Robert Mugabe has issued regulations providing the legal basis for the issuance of ‘bond notes,’ a surrogate currency his government hopes will ease a biting US dollar bank note shortage.
The announcement has immediately heightened the fear locals had that the surrogate currency was just another way to re-introduce the Zimbabwe dollar through the back door. And enterprising locals have found ways to make a killing from the greenbacks they hold, with banks also joining the fray.
After the hyperinflation crisis which wiped savings and deepened poverty, the central bank’s plans to issue the local currency have raised fears that the Mugabe government, which projects a $1 billion budget deficit this year (7 percent of GDP and 25 percent of the 2016 budget) will once again stoke inflation by resorting to printing money.
The plans have triggered some legal challenges and a series of street protests, including possibly the biggest anti-Mugabe demonstration in a decade, held on July 6.
Some cash-generating businesses, especially retailers and wholesalers, have not been banking all their cash receipts. Instead, business entities and individuals are now selling cash, at a premium, against (electronic) transfers from the cash buyers’ accounts.
Cash is now being offered to companies and individuals, who would make RTGS or inter-account transfers of the equivalent amount, plus an agreed premium, into the cash vendor’s account.
As Zimbabwe’s banknote shortage intensifies, ahead of the twice deferred introduction of bond notes, the trade of electronic US$ for physical notes has increased, at a premium of as much as 20 percent.
To manage the bank note crisis, banks have continued to reduce cash withdrawal limits — on average, individual clients can hope to get $50 per day from the bank after standing in the line for hours, while companies can access up to $300 in most cases.
Banks will now be required to report all transactions suspected to involve selling or purchasing of cash, the Reserve Bank of Zimbabwe has said, while the central bank’s anti-money laundering unit will increase its monitoring.
Although the use of electronic payment platforms such as point of sale machines or bank transfers has increased considerably, Zimbabwe’s largely informalised economy means the bulk of transactions are still on a physical cash basis.
Not to be outdone, unscrupulous characters have started printing fake bond notes which they plan to coincidentally release when the real bond notes are injected into the economy, Finance minister Patrick Chinamasa has said.
The new notes are expected to be in circulation in a few weeks’ time with the RBZ rolling out massive awareness campaigns ahead of their usage.
Addressing legislators at the at the 2017 pre-Budget seminar in Bulawayo, the Minister of Finance and Economic Development, Patrick Chinamasa, said the ongoing nationwide public awareness campaigns were meant to empower the transacting public and warn them against conmen.
“You may not be aware of this but fake bond notes have been printed to coincide with our release in order to confuse the situation,” said Minister Chinamasa. “You may also need to know that some people have been going to the people where we put orders for printing and threatening litigation and bad publicity.
“Because we have reputational issues, every threat is considered valid, which is why we are no longer giving a running commentary on what we are doing.” The minister would not elaborate on who are the culprits and how they accessed key features of the proposed notes before their release.
The initial deadline for the release of bond notes was end of October. However, the RBZ withheld their injection in order to extend campaigns and educate the public on the denominations and operations of the bond notes.
The new notes will come in denominations of $2 and $5 with an initial tranche of $75 million worth of notes set to be in circulation by end of this month. When the central bank is satisfied with the level of conversancy the public has with bond notes, they will be introduced.
Legal experts have argued that President Mugabe has, by using presidential powers regulations and not going through Parliament, grossly exceeded his powers and in so doing violated the Constitution. Constitutionally, the proper course would have been for Parliament to create a framework for the introduction of bond notes by amending the Reserve Bank of Zimbabwe Act pursuant to a monetary policy.
Said lawyer Obert Gutu: “Additionally, it can be argued that it is grossly irrational, thus a violation of the Constitution, for the President to decree an exchange rate of 1 is to 1 between the bond note and the US dollar. The basis that was used for such a valuation of Zimbabwean paper is unknown. The President does not have authority to determine the rate for the bond notes against the US dollar. Exchange rates are determined by basic supply and demand factors. The demand for a currency is influenced by factors, such as interest rates, economic growth and inflation.”
The Zimbabwean case is outside of the textbook. Here is a government wanting to have two significantly different currencies trade at 1:1 inside its borders. The same currencies can’t trade at the same rate outside of Zimbabwe because one of them is not a fungible currency, nor tradable outside of the country. The interplay between imports and exports will certainly impact the value of the surrogate currency due to its inability to trade internationally.
In economic theory, it is impossible to hold two different currencies at par without creating shortages and illegal markets as long as the currencies are materially different in properties/ functions and fundamentals that support them. Laws cannot adequately regulate a market unless they accommodate the judgement. It is also noteworthy that no measures have been put in place to curb the excessive printing of this money. The law as it stands allows the government to print as many of these bond notes as they need or want to. Thus no safeguards are in place to curb inflation.
“It is noted that the regulations are unconstitutional and thus an illegality,” said Gutu. “The people of Zimbabwe should not accept this as the President did not follow proper procedure. It is possible to seek an interdict to stop the circulation of bond notes.”
But the public has now been wearied and is ready to accept anything.
Zimbabwe is in dire need of a rescue package in the face of a financial crisis affecting the country. Expectations are that Zimbabwean authorities could negotiate for a deal.
But the country’s history of credit defaults diminished its chances of swaying creditors. Zimbabwe owes international lending institutions in excess of 10 billion dollars. Economists have suggested adopting the South African rand as its official currency but Harare is not keen on the idea.
“Zimbabwe stands to benefit if it adopts the rand,” said economic analyst Prosper Chitambara. “We could use the rand unofficially as a reference currency and use the US dollar as a reserve currency. Trading in the rand will reduce trade costs between South Africa and Zimbabwe.”
Chitambara added that the southern African nation's hostile business environment needs serious fixing.
“We need to deal with issues of production to increase exports to South Africa. The appreciating US dollar has made exports to South Africa more expensive. There is need to enhance competitiveness of Zimbabwean companies,” Chitambara said.
Zimbabweans fear the return of the 2009 hyperinflation crisis, when the country reached the highest inflation in the world. By mid-November 2008, inflation had peaked at estimated 231 million percent.
The country printed 10 dollars to 100 trillion notes in one year. “I have never been so scared about the situation in Zimbabwe,” said Munyaradzi Chiremba, a 28-year-old computer technician. “This is the last straw. I cannot bear the thought of the 2009 hyperinflation era. If it happens again, I have no choice but to leave the country.”
The bond notes are seen as decoy intentionally carried out by the government to ease its budgetary pressures. Government workers have not been receiving salaries on time, resulting in industrial actions.
“We are going to see a struggle of the financial sector. The financial system shall be under immense pressure,” economic analyst Chitambira said.
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