Bond Notes: A Final Blow to Zimbabwe’s Rock Bottom Economy?

A briefer on Zimbabwe’s impending quasi-currency

Seven years since abandoning its own currency, Zimbabwe’s government is moving full steam ahead to introduce what it calls “bond notes” into the country’s multi-currency system. The Reserve Bank of Zimbabwe (RBZ) announced this month that it has released the regulations creating the legal precedent to print and circulate the bond notes. The significance of the RBZ clearing its last “regulatory hurdle” is lost on many, and for good reason. Zimbabwe’s bizarre financial system requires some explanation especially given the fact that the term bond notes is widely unknown. Instead, it’s something the RBZ has invented in an attempt to dig itself out of the severe cash crisis plaguing the country’s rock bottom economy. This briefer provides some background information in anticipation of the imminent release of the notes.  

How did Zimbabwe get here?

Zimbabwe’s 92-year-old President Robert Mugabe has been in power for thirty-six years since the country’s independence in 1980. The country’s economic decline began in the late 90s, when, in an effort to garner political support, the government paid unbudgeted pension bonuses – amounting to approximately three percent of GDP – to more than 60,000 war veterans from the country’s war of independence. In 1998, the government spent another significant unbudgeted portion of its GDP on its controversial involvement in the Congolese civil war.  In the early 2000s ZANU-PF’s radical land reform program led to the almost complete destruction of the country’s agricultural sector, and dealt a serious blow to investor confidence in the country.

President Mugabe was defeated at the polls in 2008, but refused to relinquish power, instead unleashing a campaign of political violence in an attempt to secure its position of power ahead of runoff elections. With the Reserve Bank of Zimbabwe (RBZ) printing money as fast as the government could spend it, the currency devalued to the point where the highest value note was the 100 trillion dollar bill. Zimbabweans began to conduct business according to an informal barter system, using in-kind payments as a replacement for money, and commodities such as sugar, flour, and fuel were often used in lieu of formal currency.

 After the dramatic hyperinflation peaked at over 500 billion percent, the government chose to abandon the worthless currency, and with it, its control over monetary policy. Instead, the RBZ adopted an official dollarization policy with a mixed basket of eight official foreign currencies, including the South African rand, the euro, and US dollar. Technically, it is legal to use any one of the officially recognized currencies although in practice only the US dollar and South African rand are in circulation, with the dollar being the dominant currency. The RBZ no longer has the ability to print money, and the introduction of US dollars has given Zimbabweans a currency that holds its value despite the government’s rash actions.  Dollarization led to a period of economic recovery in Zimbabwe and control of the country’s inflation.

Seven years after dollarization, the Zimbabwe government is broke and desperate – the diamond revenues have dried up, the Chinese have stopped furnishing condition-free loans, and the country is in the throes of an el Niño-induced drought. Amidst the unravelling political turmoil caused be factional infighting in the ruling party, Zimbabwe faces a severe cash shortage.

What is a cash crisis?

Zimbabwe is running out of paper money for an array of reasons, not least because the country has a sustained trade deficit, importing far more than it exports. In August 2016, Zimbabwe recorded a trade deficit of 241.27 USD million.

Low commodity prices and the strong US dollar have limited the amount of currency coming into Zimbabwe through exports. Extreme mistrust of the government and heightened political uncertainty has caused many people to avoid the traditional banking system. The memory of the 2008 hyperinflation is fresh in the minds of all Zimbabweans who lived through it, and many fear that the introduction of bond notes will lead to a repeat of those conditions.

Earlier this year, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya issued a press statement  to announce the RBZ’s plan to address the country’s severe cash shortage. According to the RBZ, bond notes would “operate alongside the currencies within the multi-currency system and at par with the USD.” The same statement also instructed banks to curb ATM withdrawal limits to $1,000 a day, a number which was subsequently lowered to $50 a day. Anticipating the concern that citizens would have over the introduction of bond notes, this measure was put in place to avoid bank deposits being drained ahead of the imposition of the bond notes.

What are “bond notes”?

According to the RBZ, bond notes are a “domestic financial instrument” introduced to guard against the “externalization” of the US dollar. The notes will be used in day to day transactions alongside the other currencies legally in circulation in Zimbabwe. To start with, bond notes will be introduced in denominations of $2 and $5, and purportedly “derive” their value from a $200 million financing facility. The exact sources of this financing facility are unknown, but the RBZ claims that a majority of the funding comes from the country’s Nostro accounts – foreign currency accounts held by Zimbabwean banks outside of the country.

Essentially, the RBZ intends bond notes to trade on a 1:1 basis with the dollar, but insists that bond notes will not be forced on anyone who does not want them.   The notes will come into circulation sometimes this month, although the Reserve Bank has carefully avoided specifying an exact date. Bond notes cannot be exchanged outside of Zimbabwe.

Why are the new regulations important?

When the RBZ originally announced its intentions to introduce bond notes, the news was met with objection from lawyers who claimed that it violated the Constitutional provision for administrative justice. Using the Presidential Powers (Temporary Measures) Act — which has been widely criticized as blatantly unconstitutional —  the government stealthily responded to earlier criticisms of the illegality by promulgating the necessary new regulations through an amendment to the Reserve Bank of Zimbabwe Act. Now that this regulatory hurdle has been cleared, there is nothing preventing the government from introducing its notorious bond notes into circulation.

 The anticipation of President Mugabe’s corrupt government regaining control of monetary policy has sent the country into a state of panic that is only exacerbated as the inevitable release of the notes draws closer. For many of Zimbabwe’s resilient citizens, this is the ‘last straw’ and will likely trigger explosive discontent.

When the RBZ announced its intention to introduce bond notes in May this year, the news triggered ongoing protests across the country, and is widely thought to have provided significant impetus for the formation of the non-violent citizens movement that has gained momentum throughout Zimbabwe. It is unlikely that Zimbabwean citizens will embrace the new parallel currency. Tajamuka – meaning “we have rebelled” – is a multi-partisan cohort within the movement. They have been campaigning for signatures for a petition to the government to overturn its decision, and will also use the names recorded as the basis for a large class action law suit. The German company Giesecke and Devrient refused to print the bond notes following intense lobbying from movement leaders. Instead, the RBZ document addressing bond note FAQs has said that “bond notes will be printed outside Zimbabwe on an agreement that […] safeguards […] the identity of the printers.”

On November 18, the social movements have vowed to take to the streets to protest bond notes again.

What now?

The introduction of bond notes is very unpopular in Zimbabwe, where vivid memories of the hyperinflation remind Zimbabweans that the RBZ cannot be trusted. Anticipating the worst, some people have started sleeping on the street outside their banks, desperately hoping to withdraw what cash they can before the bond notes filter in to the economy.

It remains to be seen how this situation will play out. If introduced, it is highly unlikely that the bond notes will trade on par with the dollar. As was the case in Argentina in 2002, a peg against the dollar will lead to bond notes trading at a discount to actual US dollars, effectively ‘devaluing’ the bond notes on the black market.

What is clear is that Zimbabwe’s economy is inching towards the edge of a precipice, and drastic measures must be taken to address the country’s lack of cash. But unless the government is responsive to the demands of the burgeoning citizens’ movement, the imposition of yet another ‘phony currency’ is likely to result in social unrest.

Chloë McGrath is a visiting fellow at the Atlantic Council’s Africa Center. Follow her on twitter @malawicoffee.

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Image: A selection of money from the height of hyperinflation in Zimbabwe, where the largest note was once the 100 trillion dollar bill. (Photo credit: Wikimedia)