Zim banks recovery on new ‘currency’

By Lenin Ndebele

BULAWAYO-MPUMELELO Ndlovu is a worried man. As he surveys his small plot, a blanket of lush green peas almost ripe for the market, the 39-year-old vegetable farmer fears all his labour could have been for nothing.

Ndlovu, a university graduate who could not find formal employment, created his own employment by turning a small piece of land on the outskirts of Zimbabwe’s second city of Bulawayo into a thriving vegetable farm, supplying the local market with tomatoes, peas, carrots and cabbages.

“I’ve been able to look after my family and lead quite a decent life from the work I’ve done here,” he says.

But Ndlovu, like many Zimbabweans, fears the predictability of his earnings and markets is about to suffer a violent shock: the country is set to release a “surrogate local currency” which nobody can predict for sure how it will work.

Zimbabwe’s central bank says it will introduce bond notes, a token currency which will circulate within a basket of multiple currencies, at the end of this month with $75 million worth of the notes expected to be in issue by the end of the year.

Authorities argue that the move is necessary to deal with a shortage of bank notes blamed on a widening trade gap and the smuggling out of physical United States dollars, Zimbabwe’s adopted currency since it dumped its inflation-ravaged currency in 2009.

The planned bond notes are backed by a $200 million bond from Afreximbank. Under the facility, which is monitored by Afrex1imbank, the Reserve Bank of Zimbabwe cannot produce more notes or coins than what is guaranteed by the bond.

Ndlovu, like most of his compatriots, is still traumatised by the events of 2007 and 2008 when hyperinflation reached 500 billion percent and effectively wiped out all value from the Zimbabwe dollar, which was duly abandoned in favour of multiple foreign currencies including the United States dollar, the South African rand and the euro.

Last week, he tried to make a withdrawal from his bank but they could only issue him US$50 – a symptom of a major liquidity crisis gripping the country. Ndlovu fears the bond notes – contrary to what the central bank says – will make a bad situation worse.

“I saw people lose their life savings in 2008, just like that. I’ve decided I’ll rather keep my money under the pillow than send it to the bank where I won’t get it back. With the bond notes coming anytime, I just have no confidence about where this is going,” he told The Southern Times.

The announcement of the plans to introduce the notes — described by President Robert Mugabe as a surrogate currency — was met with stiff resistance, sparking demonstrations and panic withdrawals.

Former Vice President Joice Mujuru even took the government to court, arguing that it “cannot introduce a bond note and cause it to masquerade as a form of currency. The law has only two options: either the Zimbabwean dollar or foreign currencies.” The Constitutional Court dismissed her application as “premature” – because the bond notes do not exist yet.

John Mangudya, the central bank chief, is so certain that the bond notes will work that he has offered to resign if the plan backfires.

He is desperate that Zimbabweans will give the RBZ a second chance, admitting they “messed up” in 2008 when excessive printing led to the local currency’s collapse.

“I know people went through difficult times in 2007/08 but this is different,” he said last week, speaking in the city of Masvingo, where he met miners who are also anxious about the potential impact the bond notes will have on their operations.

Mangudya pleaded: “Give us a chance to do what is right for this economy, to put it back on track.

If these policy measures fail, if the bond notes do not work out, I’m willing to resign because we don’t want to give people problems, which I make myself.”

For two years now, Zimbabwe has had some form of a local currency – bond coins introduced in 2014 to ease a change crisis. Just like the bond notes, their value comes from a bond facility from the Afreximbank to the tune of US$50 million.

The central bank chief has been desperate to convince Zimbabweans that the bond notes will work just like the bond coins, which were well received and are in circulation.

“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 $2 and $5,” Mangudya said.

The bond notes will first be issued as an incentive to exporters. Between May and September, exporters have earned US$56 million in incentives, which will be paid out in the form of the token currency, central bank data shows.

The long term answer to Zimbabwe’s economic troubles, insists Mangudya, is to boost production and exports, while keeping a lid on the import bill.

Tendai Biti, the former finance minister and opposition politician, says a crisis of trust between the central bank and the public is so entrenched that Mangudya may find himself considering handing in that resignation letter before Christmas.

The opposition, which has been sponsoring violent protests against the bond notes, hopes the “surrogate currency” is the banana skin that will take President Mugabe’s Zanu PF government down.

“Despite efforts by Mangudya, he has not succeeded in convincing Zimbabweans that the bond notes are not another way of re-introducing the Zimbabwean dollar because they do not trust the government anymore,” Biti said.

“Essentially, the social contract has broken down, and so, no matter how much they try to explain it, Zimbabweans will not accept the bond notes.”

— Bond Notes Key Facts —

What caused the cash shortages?

Zimbabwe’s trade deficit, the gap between its exports and imports, has widened from an average $400 million 10 years ago to $2,5 billion at the end of 2015. Zimbabwe imports more than it exports, which means there is more money leaving the country than money coming in. With industry collapsing, more dollars are being used to import goods at a time when the country’s primary exports — commodities — have seen a decline in prices since 2013.

Another factor in the cash shortages is the strength of the US dollar against emerging market currencies such as the rand. Some reports say, over the past year, the US dollar has gained at the fastest rate in 40 years. This means there is huge demand for the US dollar, which is seen worldwide as a reserve currency.

According to Finance Minister Patrick Chinamasa: “For as long as we are using a currency which is appreciating when we have neighbours that have currencies which are depreciating, we become a mopping house. People come to mop up our US dollars. Any US dollars we bring, it will still vanish (as) people want USD as a store of value.”

Added to this mix is weak confidence in the banks, which has seen many businesses, particularly small to medium enterprises and the informal sector, avoiding depositing their money into banks. The central bank estimates that between $3 billion and $7 billion is circulating in the informal sector.

Illicit outflows also contribute significantly to the cash crunch, according to the central bank.

As much as $1.8 billion in the form of export sale proceeds and inflated management fees as well as payments for technical and professional services was funnelled out of the country in 2015, according to the RBZ.

How do bond coins and notes get their value?

Every currency gets its value from a particular source. This may be gold or currency reserves. In the case of bond coins and notes, their value comes from a bond facility from the Afreximbank. In 2014, Afreximbank put up a $50 million bond, a form of a loan, for bond coins introduced to ease the shortage of change in the economy. The planned bond notes are backed by a new $200 million bond, also from Afreximbank. The bond coins and bond notes derive their name from the fact that they are guaranteed by a bond facility.

What is to stop the RBZ from printing more than that $200 million?

Under the facility, which is monitored by Afreximbank, the RBZ cannot produce more notes or coins than what is guaranteed by the bond from Afreximbank. As at the end of December, RBZ had minted bond coins worth $14 million, and expected to produce a further $6 million at the start of 2016, according to the 2016 budget statement. The bond notes will be printed in Germany.

Why not just release that $200 million into the market instead of bond notes?

If RBZ does that, that money would still leave the country. The whole idea of the bond notes is to make sure that cash stays in Zimbabwe. However, the RBZ is unlikely to release notes worth the equivalent of the whole $200 million at the same time, but will more likely phase-in the notes depending on demand.

When will the notes start circulating?

RBZ governor John Mangudya said the notes will come into circulation at the end of October.

Can I use it outside the country?

No. Bond notes only work in Zimbabwe. The plan is to make sure the cash stays in Zimbabwe.

Is this the return of the Zimbabwe dollar?

That is a fear shared by many, given that Zimbabwe is now effectively printing its own money. According to RBZ, however, bond coins and notes can only operate under the multi-currency regime.

RBZ governor Mangudya says he has no plans to introduce a local currency, at least not until “the fundamentals are right.” With production low and no forex reserves, the local unit would only face the fate of the Zimdollar, which collapsed and lost all value.

This does not mean a local currency will not be reintroduced one day, but RBZ says it may “take years to return”. In history, no country that has adopted the US dollar as its main currency has ever reverted to its own currency. – The Source