Zimbabwe to issue new bond notes to bolster liquidity

HARARE (Capital Markets in Africa) – It was announced by the Governor of the Reserve Bank of Zimbabwe (RBZ), Dr Mangudya, on 15 September 2016, that “bond notes” will be issued by the end of October, in an effort to ease the recent cash shortages in the country. Liquidity difficulties – Zimbabwe has run out of US dollars, and does not have its own currency – have meant civil servants’ salaries are in arrears, and banks have limited cash withdrawals to as little as US$50 a day. But despite this, the bond notes have received severe criticism and sparked social unrest.

The announcement comes at a time when Zimbabwe is enduring drought and low agricultural yields, deflated foreign investment, and increasing uncertainty over the succession of President Mugabe, who will turn 93 next year.

The bond notes – a form of token currency – are to be issued from late October, with values equivalent to the US dollar.  The quantity to be issued will be correlated with exports – primarily tobacco and gold. In theory, if Zimbabwe’s exports were to fall to zero, no more bond notes would be issued. On this basis, Mangudya estimates that US$75 million of bond notes will be in circulation by the end of the year. The value of bond notes issued will be capped at US$200 million – upon exports reaching US$6 billion – corresponding to the US$200 million facility with Africa Export-Import Bank (Afreximbank) which is said to be backing the programme.

Underlying the public demonstrations against the proposed issue of the bond notes is a lack of trust in the government’s economic policy. Memories of hyperinflation and the Zim$100 trillion banknote are still raw. and there is growing discontentment with the Zanu-PF government. Zimbabweans fear that the proposed bond notes are simply a reintroduction of the Zimbabwean dollar ‘by the back door’. The RBZ’s concern is that the Zimbabwean public will either not accept the bond notes or only accept them at a severe discount – which is likely to be the case unless the public are confident that the bond notes will not be devalued by future quantitative easing. The risk is the development of a black market causing people to become poorer, rather than better off.

Mangudya confronted this public mistrust head on by promising that measures will be taken to minimise the risk of over-printing:

• Firstly, bond notes will only be issued in $2 and $5 denominations.
• Secondly, the issuing of bond notes will be overseen by an independent supervisory board consisting of various stakeholders to ensure it is in line with exports.
• Thirdly, the usage of the notes will be restricted to Zimbabwe.

Despite Mangudya’s promise, there is still public concern that when withdrawing money from the bank, people will receive bond notes instead of US dollars. If the bond issue becomes a quasi-currency, then it would allow the RBZ to retain US dollars, and could leave the public with devalued bond notes. For many, this represents a real concern.

It will be interesting to see how successful the bond notes will be – whether enough Zimbabweans will trust the Government. If the bond notes are a success they could help stimulate exports and ease cash shortages. However, the level of current civil unrest would suggest that public scepticism will be hard to overcome. It will not be long before we will find out.