Fear of the bond notes

By The NewsDay | Aug. 2, 2016 | 10 Min read

It is not surprising that almost the whole nation is against bond notes. This is natural as everyone is literally and really terrified that government is about to return us to hyper-inflation. Hyper-inflation robbed every body of the little money we possessed.

We all became penniless beggars. I was once a millionaire (then equivalent to US$8 000!), but a few days later I had a minus amount in my bank balance. This has been exacerbated by the social media report that President Robert Mugabe is about to appoint former Reserve Bank governor Gideon Gono as Finance minister. No doubt this social media message has been placed by the enemies of the President, who know that everybody is 100% against a return to hyper-inflation. Rightly or wrongly they have identified Gono as responsible for the hyper-inflation. He has, however, denied this several times.

It is essential, as the nation faces the present financial impasse that we examine as carefully and as honestly as possible whether these terrible fears of the return of the hyper-inflation nightmare are justified. Unless we do this we are liable to repeat the same mistakes.

In February 2009, just before the nation abandoned the Zimbabwe dollar, Z$12 trillion (ie 12 plus 12 zeros!) was the equivalent of US$1 on the streets. What exactly was the cause of the hyper-inflation? How far was it caused by sanctions?

It used to be illegal to utilise forex like the US dollar and the Rand in 2009, with draconian punishments like long imprisonment for those who dared to use forex. However, as the Zim dollar failed completely, with a bus fare now costing billions of dollars, people threw away the useless Zim dollars. Market places and bus stations were now full of Zimbabwe dollars thrown away on the street. I would have picked them all up except they were so dirty because they were being trampled upon. Thus the people abandoned the Zim dollar.

This was followed by the newly established government of National Unity accepting the multi-currency system which allowed Zimbabweans to legally utilise forex as their currency.

The multi-currency system was enthusiastically welcomed by all, and Zimbabweans were at long last able to buy food legally. Some of us had become used to buying bread from the boots of parked cars, as supermarket managers faced imprisonment if they sold bread above the price fixed by government. Supermarkets were ordered to sell their goods at far below the cost price. Supermarket shelves had become totally empty. Now they became full again.

The multi-currency system was introduced long after people were throwing away the Zim dollar. There was no analysis or discussion on technically sound ways of preparing and planning for such a drastic change. The government was forced to accept the change as the status quo because of a national popular revolt against hyper-inflation. We now need to analyse very carefully what exactly caused the hyper-inflation. How far was it caused by sanctions? How far was it caused by other factors? How far was it caused by Zimbabwe’s policies, strategies, and activities? If we do not do this we may be doomed to repeat the same mistakes which led to the demise of the Zimbabwe dollar in 2009. What were the causes of hyper-inflation?

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The causes of hyper-inflation include sanctions and our policies, strategies and activities in response to sanctions. Sanctions defined

Sanctions are very clearly defined under the 2001 US Zimbabwe Democracy and Recovery Act (Zidera). Zidera instructs international financial institutions such as the International Monetary Fund and the World Bank to oppose and vote against any extension of any loan, credit, or guarantee to the government of Zimbabwe. It also instructs these institutions not to cancel or reduce any indebtedness owed by the government of Zimbabwe to the United States or any international financial institution.

The European Union followed suit by applying travel bans on Zanu PF members, an embargo on arms and related material, and the freezing of funds and economic resources of Zanu PF elites. This meant there was total sanctions aimed at the financial and banking sector of the country.

Private sector banks generally follow the lead of the international financial institutions and of their governments, with very few disobeying. Sanctions also meant that Zimbabwe’s access to external banking facilities were now seriously constrained.

What this meant in real terms was that the generous Western donor aid and foreign direct investment (FDI) were suddenly cut off. Zimbabwe received an average of US$250 million a year in donor funds after Independence. This rose to US$400 million a year in the 1990s as a reward for Zimbabwe’s embrace of the Economic Structural Adjustment Programme (Esap). All donor aid to government halted in 2002.

The reasons for the sanctions were clearly enunciated: they were the Fast Track Resettlement programme, which contravened the property rights of white commercial farmers; Zimbabwe’s participation in the Democratic Republic of the Congo (DRC) war; and the use of political violence against opposition party members. Zimbabwe’s reactions towards sanctions

Zimbabwe responded to sanctions through a political and diplomatic initiative to win the support of other African countries. This was highly successful, with nearly all African countries supporting Zimbabwe against sanctions. To date African countries have consolidated their opposition to sanctions.

The second response was the expansion of the supply of money (the monetary supply), to make up for the removal of Western donor funds and FDI. This brief article will not go into the technical details of what comprises money, and how it is calculated.

In very simple terms, money represents the wealth of the country, and this wealth is calculated according to how much wealth the country produces each year and how much trade is done.

In other words, money measures how much maize we produce, how many houses we build, how much gold we produce, etc.

It also measures what we can sell and what we buy from outside (trade balance). The more maize, or houses, or gold, we produce, the richer we become, and this is represented in monetary terms. The more we export the better off we are. Sadly, since the introduction of Esap and sanctions, Zimbabwe’s exports are now limited to minerals and tobacco, with its manufacturing industries down to 30% of capacity.

In real terms, it means we import about US$6 billion a year, and export less than US$3 billion a year. We have a trade imbalance of US$3 billion each year. These imports have resulted in the destruction of our own manufacturing industries, which are often less qualitative but more expensive.

Governments, through their reserve banks, control the supply of money in their countries. Reserve banks, in collaboration with their governments, usually increase the monetary supply each year: this is an integral and accepted part of economic development.

However, it is well-known that this instrument must be utilised with the greatest care as it is closely linked to inflation. Careful expansion of the monetary supply stimulates productivity, and is known as “quantitative easing”.

Zimbabwe began to increase its monetary supply exponentially after sanctions, mainly by use of the printing press.

This led directly to hyper-inflation, as the increased amount of Zimbabwe dollar was not actually linked to increased material productivity. Zimbabwe’s supply of money became almost totally delinked from actual productivity.

In short, sanctions are very real and not a figment of our imagination. Government, through the RBZ, expanded the money supply by figures like 400 000% (in November 2008) and 1 million% (in February 2009). Such wild expansion of the money supply, however justified, caused hyper-inflation directly. Bond notes: What’s in a name?

How do the proposed bond notes differ from the bearer’s cheques? The bond notes are directly linked to the US$200 million that Zimbabwe has borrowed for this purpose from the Africa-Export-Import Bank, Afreximbank. It is a promise that the expansion of monetary supply through the printing of Zimbabwe bond notes will be limited to this borrowed amount at any one time.

Money expands through circulation: The more we use a currency, the more valuable it becomes. A currency that is thrown away and stamped upon is obviously valueless.

We also need to examine the related issue of “quantitative easing”. This is the purchase of forex by a government from private banks and private individuals, providing a “bond note” in exchange.

In other words, the Zimbabwean bond notes, according to government promise, can be exchanged for US dollars whenever we want. This has been very successfully done with bond coins, which have been in use in Zimbabwe for some time.

They have become very popular, solving the liquidity problem especially in the rural areas, where US dollars are hardly ever available. This means that Zimbabwean rural economy has more or less been forced to become a “barter economy”, with parents paying school fees through buckets of maize, chickens or goats.

Re-introducing money through bond coins was naturally very popular as it meant that instead of carrying buckets of maize, chickens or goats to pay your debts, you could pay in money.

Another activity that became prevalent at both high and low levels was the increase in corruption. Whilst some corruption always existed, it began to increase under Esap, as Esap meant it was okay for the elite to use whatever possible means to become richer.

Sanctions, and especially the Hyper-Inflation, caused corruption to expand, with “burning” money becoming a common term: this meant gambling on the exchange rate for the US dollar or the rand on the streets. Whereas the US dollar was equivalent to about Z$10 before hyper-inflation, it soon became equivalent to trillions.

Those who could “burn” money were those who had access to US dollars, viz those who had some close relationship with the RBZ (usually the political and power elite) or who had diaspora relatives who could send them forex. This minority of people were able to become billionaires or trillionaires, building the enormous houses that erupted during this period and buying the most luxurious version of the Mercedes Benz. Corruption became a popular way of life.

Will bond notes become as popular as bond coins? Strong opposition has already been expressed from all sorts of quarters, before the actual introduction of the bond notes themselves. It was obviously a serious mistake for government to give four months’ notice, leading to a run on the US dollar: everyone wants US dollars as a reserve currency, in case the Bond Notes fail. There is, naturally, a fear that bond notes will be the same as bearers’ cheques. It would have been better to introduce the bond notes sooner and very modestly so that its usefulness and popularity could be tested in reality.

In order to come up with a rational approach we need to identify exactly what use money is to the different groups of Zimbabweans, because the bond note may represent different aims and different processes. For example, industrialists will have different aims and processes than the small scale communal farmers, who incidentally comprise 68% of the population. The very large civil service, which includes about 500 000 employees, may need a different approach to both industrialists and small scale farmers.

Above all, what is going to be the “reserve currency” in the country? The big mistake made by government was to make the US dollar which is the international “reserve currency” to become the common currency for everything and every body in Zimbabwe. Not at all surprisingly our neighbours, others and ourselves, began to use Zimbabwe’s “free US dollar” currency policy for their own aims and processes. Until a few months ago anyone could export any amount of US dollars out of the country: Surprisingly in United States of America, the home of the US dollars, you will be instantly arrested if you tried to leave with US$10 000. Way out of this dilemma

Obviously we need a speedy solution, otherwise we will continue to have the run on the US dollar. Modest introduction of bond money, for example by expanding the use of bond coins, may be a very good strategy as they are already accepted and will give a boost to small scale producers such as farmers, informal traders, and bus travellers.

Introducing a very limited amount of bond notes, for example, for purchase of a limited number of goods made in Zimbabwe, would be a good way of starting this off. We have the excellent example of Weimar Germany, which successfully introduced a special currency for construction and mortgages: the two Deutsch Marks worked side by side for sometime.

Zimbabwe’s food industry could respond to the challenge posed by the South African food industry by producing goods which are qualitatively as good as the imported varieties and are also cost effective. Already our yogurt and ice creams are superior to their South African competitors.

Finally, much depends on our trust in our government. According to the bond notes strategy, government will not increase the money supply beyond the US$200 million Afreximbank loan. Do we trust their word, given that these are the same people who printed bearers’ cheques so abundantly?

We need to have much more clarity and much more detail than we have had so far. Will this lead to the re-introduction of a national currency and if so how good are our plans to cope with flight of the US dollar, the street market for USdollars and the much-feared hyper-inflation? Can we work out our solutions together, rather than through top down orders?

Fay King Chung is a former Cabinet minister and former liberation fighter