Opinion / Columnist
Zimbabwe Bond notes: Key questions answered
06 May 2016 at 08:34hrs | Views
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 recurrence of the ill-fated 'bearer cheques' that accelerated 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 the 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.
This has raised fears of the recurrence of the ill-fated 'bearer cheques' that accelerated 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 the 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.
Source - chronicle
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