Opinion / Columnist
The bond notes will fail in the same way the Zimdollar
29 Nov 2016 at 21:13hrs | Views
.....and the bearers' cheque failed
The Zimbabwe dollar that was inherited from the Rhodesian government in 1980 with the exchange rate of one to one with the US dollar collapsed in 2009. The Rhodesian government used the dollar for the rest of its life in power and maintained its market strength even in the face of sanctions against that government during its resistance against the liberation struggle of Zimbabwe. When the now purported majority government of Robert Mugabe attained power in both the functional and fiscal management the dollar begin to crumble in its buying power and value against other currencies going through periods of hyperinflation.
Hyperinflation reduced the Zimbabwe dollar to one of the lowest valued currency unit in the world. The nation saw the dollar being re-dominated five times with the first issue between 1980 and 1994. The largest denomination was 20 dollars in 1994. The second issue was between 1997 and 2003. The largest denomination by the end of 2003 was 1000 dollars. The third issue was between 2004 and 2006 and the largest denomination by the end of 2006 was 100 000 dollars bearers' cheque. The forth issue was between 2007 and 2008. The largest denomination at the end of 2008 was 100 billion dollars bearers' cheque. During the period 2008/09 the country had come to a standstill with no food in shops, economic production completely halted and factories closed, service delivery simply collapsed with daily electric load shading and water cuts, the social infrastructure shrunk and the bearers cheques became completely useless and people rejected them. The whole community of Zimbabwe was hit by a cash crunch, poverty and starvation much to the amazing of the government of Robert Mugabe. The fifth issue was in 2009 when the government first introduced the United States dollar with other currencies such as the rand and pula to replace its own Zimbabwe dollar and bearers' cheques. The Zimbabwe dollar was completely withdrawn from circulation April 30, 2009 due to galloping hyperinflation. When this happened people lost their pensions, savings, financial investments and creditors lost money due to dollarization
The government is now introducing the bond notes set against the $200 million loan facility from Afreximbank. Afreximbank is not issuing the bonds but has extended a loan facility of $200 million dollars to the Zimbabwe government as a guarantee for the bond. Instead of allowing the circulation of this $200 million loan facility in US dollars in the Zimbabwe money market government has opted to print bond notes which in essence are not different from the bearer cheques of 2008/09. Bond notes are valueless without the backing of a reliable and stable currency and other securities. Afreximbank has nothing to do with printing of bond notes. It has nothing to do with how the bond notes look like or how many of these bond notes are printed. What the people are not told by the government are the terms and conditions of the Afreximbank $200 million loan to the government on how the loan will be repaid, the length of time for the repayment and the rate of interest on this loan or whether this will be a revolving loan. If Zimbabwe is not going to produce goods for its consumption and export it is inconceivable to see how the loan will be repaid and sustained. The thinking behind the bond notes is to increase the cash flow in the Zimbabwe internal market and economies. Bonds or bond notes are normally issued against securities such as gold and currency reserves of a country. Zimbabwe does not have these securities in its currency reserves. It does not have its own currency as a country and it does not have gold reserves and other ornamental mineral like diamonds that were cause for corruption a value amounting to 15 billion dollars that is way more than the government has borrowed from Afreximbank and enough to sustain the economy of the country. The government is issuing self-printed bond notes against borrowed money and the temptation for it will be to keep printing the bond notes well in excess of the 200 million dollars guarantee. This approach was used by the then governor of the reserve bank, Gideon Gono using a formula that he referred it to quantitative easing; printing more money in defiance of economic forces.
The reasons that led to the collapse of the Zimbabwe dollar and later the bearers' cheques are the same reasons that will lead to the dead end of the bond notes. The collapse of the Zimbabwe currency was a result of ZANU PF government indiscipline in fiscal decisions and fiscal management, poor economic choices, poor investment policies, disregard of market forces and the endemic corruption within ZANU PF government. The market forces are influenced by the supply side and demand. Market forces cannot be influenced by a presidential pronouncement as in the case of the bond notes where the reserve bank of Zimbabwe fabricates information by saying the bond note has an equal value as the US dollar. The bond note (bond paper or bond) is just like the bearer cheque. It is not true money. It is not a legal tender. It can be refused when tendered but government is forcing it on the captive Zimbabweans. Money cannot be forced on people especial when people have clearly expressed a lack of confidence in it.
In the hours of the circulation of bond notes the market forces have reduced the bond note down by 30% to US dollars. This means that people depositing their money in US dollars will have to buy back their own money by tendering more bond notes. The initial observation is that the government is hell bent on collecting all the US dollars from the public and replacing them with the bond notes. If a US dollar is tendered the change is given in bond notes; what a big violation of the rights of people. The result is that people will hold back their US dollars from circulation. They will also be an upsurge of the black market run by government officials pushing up inflationary rates, the cost of goods and services will go up beyond the reach of ordinary people and the US dollar will completely disappear from the market. There is also the confusion of pricing for goods and services. Will the prices be quoted in US dollar or US dollars bond notes?
In essence the government wants to stop people from buying commodities outside the country. The government will then open premium bank accounts exclusively for government officials, their business connections and friends who will have unlimited access to the US dollar making then the only ones importing goods for resale in Zimbabwe at a higher price. All other citizens will be expected to apply for the US dollar if they have to travel abroad or if they want to import goods from other countries. This is why the courts and government officials are not opposing the introduction of bond notes because they personally stand to benefit from this project. The introduction of bond notes is a plan that replaces the ban on imports of goods that failed because of the people's resistance that rioted in Beitbridge boarder town.
The general elections are due in 2018. The ZANU PF government is making financial preparations to save enough US dollars for the election rigging funds. ZANU PF knows that it will not win elections in Zimbabwe without election bribes, rigging and intimidations. ZANU PF needs money to finance these activities. It won't be surprising to hear that the US dollar will be a preserve of ZANU PF supporters nearer the elections in 2018.
The introduction of bond notes is not a lasting solution to the currency problems in Zimbabwe. The stability of a currency requires a stable political administration with sound and disciplined social and economic policies. Until such a time the ZANU PF government ceases to govern, the problems of the people of Zimbabwe will continue to mount much to the disadvantages of this generation and the next generation.
The Zimbabwe dollar that was inherited from the Rhodesian government in 1980 with the exchange rate of one to one with the US dollar collapsed in 2009. The Rhodesian government used the dollar for the rest of its life in power and maintained its market strength even in the face of sanctions against that government during its resistance against the liberation struggle of Zimbabwe. When the now purported majority government of Robert Mugabe attained power in both the functional and fiscal management the dollar begin to crumble in its buying power and value against other currencies going through periods of hyperinflation.
Hyperinflation reduced the Zimbabwe dollar to one of the lowest valued currency unit in the world. The nation saw the dollar being re-dominated five times with the first issue between 1980 and 1994. The largest denomination was 20 dollars in 1994. The second issue was between 1997 and 2003. The largest denomination by the end of 2003 was 1000 dollars. The third issue was between 2004 and 2006 and the largest denomination by the end of 2006 was 100 000 dollars bearers' cheque. The forth issue was between 2007 and 2008. The largest denomination at the end of 2008 was 100 billion dollars bearers' cheque. During the period 2008/09 the country had come to a standstill with no food in shops, economic production completely halted and factories closed, service delivery simply collapsed with daily electric load shading and water cuts, the social infrastructure shrunk and the bearers cheques became completely useless and people rejected them. The whole community of Zimbabwe was hit by a cash crunch, poverty and starvation much to the amazing of the government of Robert Mugabe. The fifth issue was in 2009 when the government first introduced the United States dollar with other currencies such as the rand and pula to replace its own Zimbabwe dollar and bearers' cheques. The Zimbabwe dollar was completely withdrawn from circulation April 30, 2009 due to galloping hyperinflation. When this happened people lost their pensions, savings, financial investments and creditors lost money due to dollarization
The government is now introducing the bond notes set against the $200 million loan facility from Afreximbank. Afreximbank is not issuing the bonds but has extended a loan facility of $200 million dollars to the Zimbabwe government as a guarantee for the bond. Instead of allowing the circulation of this $200 million loan facility in US dollars in the Zimbabwe money market government has opted to print bond notes which in essence are not different from the bearer cheques of 2008/09. Bond notes are valueless without the backing of a reliable and stable currency and other securities. Afreximbank has nothing to do with printing of bond notes. It has nothing to do with how the bond notes look like or how many of these bond notes are printed. What the people are not told by the government are the terms and conditions of the Afreximbank $200 million loan to the government on how the loan will be repaid, the length of time for the repayment and the rate of interest on this loan or whether this will be a revolving loan. If Zimbabwe is not going to produce goods for its consumption and export it is inconceivable to see how the loan will be repaid and sustained. The thinking behind the bond notes is to increase the cash flow in the Zimbabwe internal market and economies. Bonds or bond notes are normally issued against securities such as gold and currency reserves of a country. Zimbabwe does not have these securities in its currency reserves. It does not have its own currency as a country and it does not have gold reserves and other ornamental mineral like diamonds that were cause for corruption a value amounting to 15 billion dollars that is way more than the government has borrowed from Afreximbank and enough to sustain the economy of the country. The government is issuing self-printed bond notes against borrowed money and the temptation for it will be to keep printing the bond notes well in excess of the 200 million dollars guarantee. This approach was used by the then governor of the reserve bank, Gideon Gono using a formula that he referred it to quantitative easing; printing more money in defiance of economic forces.
The reasons that led to the collapse of the Zimbabwe dollar and later the bearers' cheques are the same reasons that will lead to the dead end of the bond notes. The collapse of the Zimbabwe currency was a result of ZANU PF government indiscipline in fiscal decisions and fiscal management, poor economic choices, poor investment policies, disregard of market forces and the endemic corruption within ZANU PF government. The market forces are influenced by the supply side and demand. Market forces cannot be influenced by a presidential pronouncement as in the case of the bond notes where the reserve bank of Zimbabwe fabricates information by saying the bond note has an equal value as the US dollar. The bond note (bond paper or bond) is just like the bearer cheque. It is not true money. It is not a legal tender. It can be refused when tendered but government is forcing it on the captive Zimbabweans. Money cannot be forced on people especial when people have clearly expressed a lack of confidence in it.
In the hours of the circulation of bond notes the market forces have reduced the bond note down by 30% to US dollars. This means that people depositing their money in US dollars will have to buy back their own money by tendering more bond notes. The initial observation is that the government is hell bent on collecting all the US dollars from the public and replacing them with the bond notes. If a US dollar is tendered the change is given in bond notes; what a big violation of the rights of people. The result is that people will hold back their US dollars from circulation. They will also be an upsurge of the black market run by government officials pushing up inflationary rates, the cost of goods and services will go up beyond the reach of ordinary people and the US dollar will completely disappear from the market. There is also the confusion of pricing for goods and services. Will the prices be quoted in US dollar or US dollars bond notes?
In essence the government wants to stop people from buying commodities outside the country. The government will then open premium bank accounts exclusively for government officials, their business connections and friends who will have unlimited access to the US dollar making then the only ones importing goods for resale in Zimbabwe at a higher price. All other citizens will be expected to apply for the US dollar if they have to travel abroad or if they want to import goods from other countries. This is why the courts and government officials are not opposing the introduction of bond notes because they personally stand to benefit from this project. The introduction of bond notes is a plan that replaces the ban on imports of goods that failed because of the people's resistance that rioted in Beitbridge boarder town.
The general elections are due in 2018. The ZANU PF government is making financial preparations to save enough US dollars for the election rigging funds. ZANU PF knows that it will not win elections in Zimbabwe without election bribes, rigging and intimidations. ZANU PF needs money to finance these activities. It won't be surprising to hear that the US dollar will be a preserve of ZANU PF supporters nearer the elections in 2018.
The introduction of bond notes is not a lasting solution to the currency problems in Zimbabwe. The stability of a currency requires a stable political administration with sound and disciplined social and economic policies. Until such a time the ZANU PF government ceases to govern, the problems of the people of Zimbabwe will continue to mount much to the disadvantages of this generation and the next generation.
Source - Themba Mthethwa
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