Zimbabwe: Can bond notes gamble revive the economy?

Deep structural change is needed to turn around Zimbabwe’s ailing economy.


Zimbabwe’s beleaguered economy is falling further into despair. Once thriving, the country’s platinum and tobacco industries have faltered as commodity prices remain low. 

Out of date infrastructure and business policy has thwarted the development of the private sector, and a devastating drought threatens nearly a quarter of the population with starvation. Foreign exchange reserves are dwindling, limiting the government’s ability to fund the budget.

This has been exacerbated by huge illicit flows of dollars out of the country. According to ratings agency Moody’s, more than $2.1bn, about 15% of GDP, of illegal financial outflows left Zimbabwe in 2015 alone.

Salaries haven’t been paid, public services are crumbling and unemployment rates are estimated to be anything between 5% and 85%. Many of Zimbabwe’s troubles have been blamed on the country’s obstinate leader Robert Mugabe and mounting protests have been calling on him to step down.

In a last ditch attempt to encourage exports and to shore up much needed foreign exchange, the Reserve Bank of Zimbabwe (RBZ) announced plans to introduce a bond note programme – in effect, a package whereby the central bank prints a new quasi-currency to be used in-country only – to alleviate some of the pain caused by the cash crunch. It is hoped that the programme will encourage locals to move away from using dollars for domestic transactions, but the overarching reason is to encourage exports.

“Exporters that earn US dollars or any other foreign currency in transactions going through the normal banking system have the benefit of making up to 5% on top of their export earnings. The 5% is an export incentive payable in bond notes,” says William Manhimanzi, deputy financial director at the RBZ. 

The main purpose of issuing bond notes as opposed to paying exporters in dollars directly is to prevent the bonus scheme leading to capital flight. One note is equal in value to $1 and the notes have been issued in $2 and $5 denominations.

Since 28th November, $17m worth of freshly printed bond notes have been released into circulation. The rest of the notes will be introduced gradually.

“With a 5% bonus, exporters are incentivised to produce more and export more. Exports bring in foreign exchange and can help bolster central bank reserves,” says Manhimanzi.

 Mired in controversy

But the bond note programme is mired in controversy, with some analysts disputing whether it is backed by a $200m facility from the Cairo-based African Export-Import (Afrexim) Bank, thus bringing into question legitimacy around the move. “We understand that while Afreximbank is supporting trade within the gold industry, they have not committed to backing the bond note programme directly,” said Gaimin Nonyane, head of the economics desk at Ecobank.

A spokesperson for Cairo-headquartered Afreximbank declined to comment and referred all queries to the RBZ. Douglas Muranda, head of oversight and risk management at the RBZ, confirmed to African Business that the programme is backed by Afreximbank. Meanwhile, Manhimanzi would only confirm that the bond notes are, and have been, backed by a $200m offshore facility since their inception in May 2016.

Alongside the confusion, the move has brought back traumatic memories for locals throughout the country. In 2009, Zimbabwe took the bold decision to abandon its domestic currency following a period of hyperinflation that essentially made the Zimbabwe dollar worthless.

Locals lost their life savings and their trust in the government and central bank. Since then, the economy has run on a mix of rand, euros, pound sterling and, mainly, dollars to do business at home and across borders. Because the monetary regime is now dollarised, the central bank cannot act as a lender of last resort when liquidity is low or if there is a financial crisis.

For some, the bond notes mark a return to the defunct Zimbabwean dollar and a move to even tougher times. Reports abound that individuals, businesses and even some government personnel are unwilling to take bond notes in place of dollars.

Allegedly, the parallel market has been bolstered as locals rush to change bond notes into other currencies. Trust in the government and central bank is depressingly low.

Fear of hyperinflation

“The experiences of the late 2000s are ingrained in people’s minds and they do not want to go through anything like that again. We understand this. But what some people haven’t been able to grasp is that this is not a move to introduce a new currency but a move to encourage exports,” says Manhimanzi.

In that respect, the bond note programme has already been a success for the central bank: “We are confident that export volumes will increase as a result of these measures,” he says.

But as Zuzana Brixiova, vice president and senior analyst at Moody’s, says: “While in theory, a bond note programme could work, in the Zimbabwean context monetary policies alone will not be enough to fix the economy.

“People do not trust the notes, which they perceive as an attempt to reintroduce the Zimbabwean dollar, a currency they associate with hyperinflation. Structural change is needed if Zimbabwe is going to turn itself around.”

On 8th December when finance minister Patrick Chinamasa began his speech, it became apparent that long unaddressed structural issues are at the core of the country’s economic woes. He began ominously, saying, “The fundamental challenge remains that of under-production, entirely across all sectors of the economy,” later stating that “in the absence of a robust fiscal adjustment and structural reforms … the persistent deterioration in the macro-economic environment will continue to incapacitate the country’s ability to honour its obligations to all its creditors and to move forward.”

For real structural change, portfolio flows and foreign investment to boost the economy and liquidity is essential. But with huge arrears – $610m to the African Development Bank, $1.16bn to the World Bank and $240m to the European Investment Bank – Zimbabwe has essentially no access to concessional finance and international capital markets.

For now, investors are keeping their distance. Portfolio flows and foreign direct investment into Zimbabwe is at an all-time low. Capital inflows for 2016 are expected to reach $692m – just half of what the country attracted in 2015. A U-turn in investor sentiment and public opinion will be difficult to achieve with a bond note programme alone.

Kanika Saigal

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