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Will the bond notes survive the test of time

It’s now official — Zimbabwe will introduce bond notes end of October 2016. The Reserve Bank of Zimbabwe confirmed this in its mid-term monetary policy statement. At the same time, the Constitutional Court will hear on Wednesday an application by Joice Mujuru who is contesting the introduction of the notes.


The notes will circulate at par with the US dollar, that is at one bond note to one US dollar. The US dollar proxy will be backed by a $200 million countercyclical facility from African Export-Import Bank (Afreximbank). A maximum of an equivalent of $200 million in the surrogate currency will be introduced into the system. It is anticipated that bond notes equivalent to about $75 million will be circulating by end of December 2016.

The bond notes will be introduced under an export incentive scheme, which is aimed at promoting the export of goods and services while stemming US dollar capital flight from Zimbabwe. The surrogate currency’s convertibility will be limited only within the borders of Zimbabwe. You may not transact in the bond currency in other countries outside of Zimbabwe as the notes are not technically a legal tender. If this export incentive capital flight plug equation works, by encouraging exports and while simultaneously reducing capital flight, Zimbabwe could build up its foreign reserves quite quickly. But this is a simplistic view. Imports are so entrenched into the economy that to compete with these imports — some of them so cheap — the local industry needs to invest in recapitalising its capacity. The world has moved on in terms of technology and processes during the “lost decade” that most Zimbabwean manufacturers and service providers may require significant investment in the newest and efficient technologies to compete in a global market. This extensive investment would require that both local and international investors be confident about the future of the country. This confidence is a precursor for rebuilding the economy. On the other hand, given that the export incentive is backed up by a loan facility, the cost to the fiscus of funding a 5% export incentive should be less than the benefit that will flow through from increased exports for it to make economic sense.

The bonds will be availed to exporters and will filter into the rest of the system as beneficiary exporters transact. As we noted in our May 2016 instalment, most people in the country view this introduction as a pre-cursor for the re-introduction of a domestic currency in which the RBZ will have much control over. While this bond note introduction is part of a bouquet of solutions to address the liquidity crunch in the country, the authorities should not ignore the memories people have of the hyperinflation eight years back, when official inflation crested at 79,6 billion percent.  No sovereign currency can sustain its value in such an environment. It was a period of “financial madness” in which the citizenry lost all its hard-earned savings. Imagine for once what happened to people’s pensions, which ordinarily should have been “protected” under fund management mandates. The fundamental investment objective of retirement funds is to administer funds in such a way as to provide for the retirement objectives. Boards of management have a fiduciary duty to beneficiaries that the benefits provided for in terms on the rules of the funds they manage are actually delivered. But our pensioners and savers lost virtually everything. Can we just ignore the pain of people losing everything they worked for? Who should carry the responsibility for that financial madness? It is questions like these and the pain that people experienced that has usurped people’s confidence in supporting the re-introduction of a local currency, in whatever form the currency is in, before the right conditions prevail.

The RBZ stated that the bond notes “shall not be forced on people”. The aggregation of millions of individual decisions will point to the acceptability of these soon-to- be-introduced notes. The market has a way of valuing an asset or a currency.  It is widely acknowledged that money derives value based on the public’s willingness to support the face value of the notes or coins. Banking is all about trust — if people cannot trust the existing system, the unfortunate outcome is that people will revert to the “black market” and trade in a currency they trust. Rightly so, the RBZ governor pointed out that the conditions for the return of the local currency are not yet prevailing.

The message from international investors is clear — Harare’s biggest challenge is the politics. Fundamental issues still need to be addressed to encourage local investment, production, policy consistency and build people’s trust on the country’s monetary and fiscal system. The country is competing for global capital and markets like any other country. We, however, are not sure how the introduction of “smaller denominations of bond notes of $2 and $5” will address the “public’s concerns, fear, anxiety and scepticism around bond notes”. It’s a matter of time before we know whether the bond notes will survive the test of trust.

Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on media@opportunvest.co.za

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