By Lovemore Ranga Mataire
FACED with a biting cash shortage, Zimbabwe this week laid the groundwork for the introduction of bond notes to complement other currencies in circulation by promulgating the law that sets out the legal framework for their acceptance as legal tender.
President Robert Mugabe early this week gazetted Statutory Instrument 133 of 2016 that effectively removed any doubts about the impending introduction of the notes expected to ease shortages in banks.
The instrument empowers the Reserve Bank of Zimbabwe to issue the bond notes using its preferred design, form and material. Section of the 44B of the amendment reads:
“The Minister may by notice in a Statutory Instrument prescribe that a tender of payment of bond notes and coins issued by the bank that are exchangeable at par value with any specified currency other than Zimbabwean currency prescribed as legal tender for the purposes of Section 44A, shall be legal tender in all transactions in Zimbabwe to the same extent as that prescribed currency.”
According to the statutory instrument, RBZ will determine the outlook of the bond notes and coins. A bond note unit will trade at par with one US dollar, according to a government notice.
In a statement soon after the coming into effect of the legal framework, Finance Minister Patrick Chinamasa said creditors were obliged to accept payment in bond notes and that if one “owes you money in United States dollars, you must accept payment in bond notes. You cannot refuse (because) one would have discharged his or her obligation to you.”
He said the RBZ will put the bond notes in circulation as soon as it was done with the public awareness campaign on the denominations, design, form, material and security features.
Cognisant of the controversy and uncertainty surrounding the introduction of the bond notes, Vice President Emmerson Mnangagwa suggested that the government may come up with a policy that makes the notes exclusively usable for certain transactions as a way of encouraging their usage.
He, however, said there will be no separation of accounts for bond notes and foreign currency as the two could be used interchangeably.
Mnangagwa said this while speaking to Zimbabwe embassy staff in Switzerland where he was attending the Universal Periodic Review meeting of the United Nations Human Rights Council.
“The US dollar is a reserve currency. It is a precious currency to most countries in the world. Zimbabwe is a unique country, which is abusing the US dollar. We said we must use the US dollar for the purpose we designed it,” he said.
“We needed to find a mode of transaction that is domestic because if you put US$200 million into Zimbabwe today, after a few days, it’s all taken out. It is not even going through the banking system. Some even smuggle it through tyres,” said Mnangagwa.
Zimbabwe informally dollarised in 2009 to tame hyperinflation, which peaked at 500 billion percent at the height of a political and economic crisis in 2008, but has experienced an acute shortage of US dollar notes since the beginning of the year, blamed on the country’s ever widening trade gap, among other factors.
In May, the central bank announced its plans to circulate bond notes alongside the US dollar and other currencies in Zimbabwe’s multi-currency basket, which also includes South Africa’s rand, Botswana’s pula, China’s yuan, the euro, British pound and Japan’s yen.
The central bank says the surrogate currency will be backed by a US$200 million facility provided by the African Export Import bank.
After the hyperinflation crisis which wiped savings and deepened poverty, the central bank’s plans to issue a local currency have raised fears that the government, which projects a US$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 central bank has repeatedly promised not to print bond notes beyond the US$200 million backing, insisting the bond notes are primarily an incentive for exporters, who will get up to 5 percent of the value of their exports, paid in the local currency, in a bid to close a trade gap which has seen the country ship out US$20 billion for imports since 2009.
In 2014, the RBZ introduced bond coins, backed by a US$50 million AfreximBank facility in a bid to resolve the shortage of small change. Despite initial scepticism and resistance, the coins have gained widespread acceptance and use in the economy.