RBZ’s new bond notes: key questions answered

RBZ’s new bond notes: key questions answered

HARARE, May 5 (The Source) – The Reserve Bank of Zimbabwe has announced plans to introduce local “bond notes” to circulate alongside a basket of foreign currencies adopted in 2009, in a bid to ease widespread cash shortages stalking its sluggish economy. This has raised fears of the recurrance of the ill-fated ‘bearer cheques’ that accelarated inflation, which rendered the local currency worthless. The Source interrogates the key questions.

 What caused the cash shortages in the first place?

The cash shortages are a combination of various factors. 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.

Finance Minister Patrick Chinamasa said on Wednesday: “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 funneled out of the country in 2015, according to the RBZ.

 How exactly do these 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.

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 told reporters the notes would be produced “after two months.” They were still at design stage, he said.

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.

So how does RBZ plan to solve the currency crunch?

RBZ’s plan evolves around the following: limiting daily withdrawals, increasing the use of the Rand, giving priority of US dollar spending to key areas like fuel and machinery, converting export receipts into rand and other currencies, and increasing usage of electronic and plastic money.

RBZ says Rand use was down to five percent on the market, from 49 percent when the multicurrency system started in 2009. Now, for every dollar that comes into Zimbabwe from exports, 40 cents will be converted into rand and 10 cents into Euro.

So if I send my mother money from here in the UK, will she get part of it in Rand?

According to the RBZ, remittances and NGO funds will not be converted to Rand.

What are the withdrawal limits?

You can now withdraw $1,000, 1,000 Euros and R20,000 per day. In addition to this, you are now only allowed to take similar maximum amounts out of the country at a time.

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 also told media on Wednesday 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.

In 2015, the Zimdollar was “demonetised”, or taken completely out of circulation. 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.

  • Fred Muchena

    nxa

  • Tatenda

    Why will they not make money easier to use by having plastic money transanctions for service providers. In SA no charges for swiping why is it that the high charges for swiping are still evident in this country

  • Stanley S

    The only real viable solution to this is to create a conducive atmosphere that encourages FDI inflow and subsequent revamping of secondary industry which would meet local demand as well as contribute to export earnings. For as long as the economy heavily relies on exporting primary commodities, the economic woes will never vanish and the Trade Deficit which is actually the major problem will continue to rise. Remember prices of primary commodities are ultimately controlled by market forces unlike secondary commodities.

  • Tino_Namatako

    Its unfortunate people’s le dont see the moose right in front of us all. Mugabe is the problem, trying to solve economic crises with him in there is like trying to solve for x in a quadratic equation where someone put in a gamma which is not supposed to be part of the equation! Get rid of the Gamma first then you deal with the x! Mugabe must go before we talk of FDIs, he’s the biggest Moose eating our future while we are watching and we ain’t doing nothing about it. Ona different note, why the councidence kuti muzukuru azvarwa ku Singapore uko mari yoshaijwa munyika? Coukd it be that the Mugabes are stashing every dollar available in some foreign banks to ensure their future and those of the great great grand children is secured and sealed ? Arise zimbabwe arise!

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  • Murambiwa F

    I think you got your reasoning on the cause of the cash shortage terribly wrong. According to you, because we are importing more than we are exporting then we are supposed to have a shortage of cash in the bank. That is total bollocks being peddled to mast the real issue. The issue is that when we dollarised, each and everyone of us had zero usd balanced. Through hard work we all earned in USD and our earnings, in real USD was deposited in the system. For anyone to make a payment outside, this was basically backed by real cash. they needed to have earned the money fair and square to be able to make such a payment. At no time has the system allowed people to import with what they don’t have in their accounts and is backed by real cash. As such the stock of cash may increase or deplete, but the equation always balances. no cash shortages can be generated by this. the real reason why we have cash shortages is that someone has managed to access cash that they did not put in the system and when we all came looking for what we deposited the cash was not there. Disequilibrium came because there are some bank deposits or withdrawals that were made without an equal amount being deposited in real USD in the system and i can point you to the major ones. (1) TB maturities that are being honored at a time that we know revenue collection currently equals recurrent expenditure. This is simply being met by pushing figures not backed by real cash (2) Civil servants salaries and bonuses that we all know are proving difficult to pay can simply be wished away by pushing balances without real cash backing. When this happens, it means there is not enough notes and coins to back bank balances. This should never obtain in a market where we don’t print the notes. We get our notes from the US for crying out loud and at no time are we supposed to have a shortage. there are key observations though. Theoretically, money in our accounts’ worth can be calculated as the total amount of notes, coins and nostro balances divided by the gross deposits less vostros of course. Conditions on the ground indicates that this is not at par with the USD. your money has been stolen, not the figures, but it has been disenfranchised while you hold it. Any issue of notes supposedly at par with the USD is simply diluting the little that remains, in other words, more thieving is in the offing. What then shall we do

    1. whoever took what was not his/hers must pay back the money. that should not be negotiated.

    2. the RBZ is by all accounts a discredited institution and should not be allowed anywhere near our savings or resources that are oiling companies we work for. We should agitate for the total stripping of power of the RBZ over our financial affairs and subcontracting it to a credible institution like the South African Reserve Bank. Let anyone with their savings be allowed to keep them with an SA domiciled bank and companies to be banked as such until such a time that the bank has reformed.

    This can alternatively be achieved by handing over functions to do with keeping our savings and local banking institutions’ savings to the same bank

    they can go around doing spot checks all they want but should never be allowed anywhere near cash

    3. we need to put stringent measure in our constitution that makes it sacrosanct for any such future printing of cash under the foresight of parliament. it should be criminal and able to attract the death penalty should a sitting governor of a bank agree for whatever reason to print money away from public glare.

    If this bond note thing passes, all we are doing is give people the opportunity to take their hand out of the cookie jar without us watching. There has to be real truths said before we can move on otherwise we shall go in circles until madhongi amera nyanga

    • Blessmore Rudziva

      I second that. This is exactly what i have been saying also. This whole Trade deficit is BS. Nonsense chaiyo. How is the RBZ managing to honour all those TBs that are maturing, were did the funds come from. These are just book entries, no real value

    • Tinashe WeZhira

      You got some points here, Murambiwa. Just don’t miss the fact,,,,,,,,,,,,,importing more has a negative n direct effect on the availability of hard cash or real cash. We may remain with the same value at the end of the day but it will be in assets not real cash. For example, when I withdraw $ to import vehicles I may not in turn deposit those vehicles in the bank for some1 to withdraw

      • Murambiwa F

        but the amount that you buy your car with will not demand cash from te system. Some1 can only withdraw what they would have put in. the equation still balances

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