Government can’t hide from Bond Notes

Govt can’t hide from Bond Notes

Kukurigo Editorial

1 November 2018

Bond Notes, Zimbabwe’s surrogate currency

The economy has moved on but government is digging in.

Businesses have incorporated the parallel-market cost of foreign currency into their pricing in recognition of the reality that Bond Notes and RTGS dollars are not at par with the US dollar. [Real Time Gross Settlement (RTGS) allows individuals, companies and firms to transfer funds from one bank to another.] A bottle of olive oil now costs RTGS$34 while a nine-pack of reasonable quality toilet paper will set you back RTGS$30. These are clearly not US dollars, but Government insists otherwise.

Our banks hold about US$10 billion dollars in electronic balances (RTGS) and $400 million in Bond Notes is circulating. Neither are backed by US dollar cash in bank vaults or funds in nostro accounts. These two are surrogate currencies and have rightly been called the Zimbabwean dollar.

Govt could print an additional $200 million Bond Notes tomorrow morning and claim that these too are US dollars. Indeed, government began its ill-fated Bond Notes experiment falsely claiming to have a US$200 million Afreximbank guarantee for the notes.

Kukurigo has established that no such guarantee exists.

Government has now printed $400 million of Bond Notes and has made no effort to explain what backs the additional $200 million. The answer is nothing, as with the first batch.

Government is well aware that that its surrogate currencies are not at par with the US dollar; it has simply chosen political survival and the expense of the economy.

Finance Minister Mthuli Ncube was very clear at Chatham House in London that the parallel market was a legitimate expression of value. He also said he was not interested in fighting the market and intimated that government would liberalise the exchange rate and allow legal trading between RTGS and US dollars.

A few days later he had changed his experienced professor mind and was now singing from the irrational 1:1 hymn book. The esteemed economist apparently now believes, against all economic principles, that he can fight the market into accepting that our surrogate currencies are at par with US dollars. It is absurd.

Professor Ncube does not really believe that; he’s reluctantly playing politics after being pressured by Zanu PF to abandon economic orthodoxy.

The real problem for Zanu PF is that a liberal exchange environment would immediately make apparent the extent of our economic problems. The actual cost of a loaf of bread is above $3 in the local currency. Fuel would also jump to above $4 a litre.

Such an economic shock could very well lead to an uprising. Talk is cheap, actual reforms can be dangerous.

To sustain this fraud, government has resorted to robbing platinum, gold and tobacco exporters of their hard-earned foreign currency replacing it with RTGS dollars at 1:1. This is how fuel and cooking oil prices have not changed while prices of everything else that is not allocated foreign currency at 1:1 is has increased in price.

This elaborate Ponzi scheme is now showing violent signs of instability. The gold miners are unable to continue operations as they do not have the foreign currency required to buy consumables. RioZim has closed three mines.

The reality is that our consumption is unsustainable. That consumption has been subsidized by taking foreign currency from exporters and handing them RTGS dollars on the fraud that the two are at par. The exporters have had enough and are unwilling to carry on this fake US dollar charade.

The critical point to note is that the electronic balances in our banks are now completely delinked from real US dollars. This can be best illustrated by the growth in money supply over the past three years. It has doubled. When we dollarised in 2009 every bank deposit was backed by physical notes and coins. The banks now have virtually zero notes and coins. This is the clearest evidence that government has been printing aggressively via the RBZ overdraft and that money it has been printing has no connection to the greenback. It is a shameful fraud.

Government is now in an impossible position. If it continues to strip exporters of their foreign currency earnings, those exporters will stop producing and there will be no foreign currency to subsidise basic commodities. On the other hand, if it allows them to keep their foreign currency earnings, then government will not have the money it requires to sustain the Ponzi scheme.

There is no easy way out, Mr President.

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