Zimbabwe takes a step towards fiscal reality

CAPE TOWN — It seems the Zimbabwean government and central bank are finally engaging with the harsh reality that their quasi-currency, the Bond Note, cannot be equated to the US dollar in value. Which is why they’ve now finally devalued it more in line with practice on the ground. This year-long spell in national lala-land saw inflation soar from below four percent to 57%, fuel prices hiked to the most expensive in the world and shops offering up to 70% discount to people who paid them in dollars. Perhaps President Emmerson Mnangagwa and his cabinet have converted to Pantheism* whose adherents are fond of saying there is no God but Reality and that all else is the action of The Fall. We can always wish. This story outlines the reality in Zanu PF’s backyard. – Chris Bateman

By Godfrey Marawanyika

(Bloomberg) – Zimbabwe’s central bank is considering devaluing its quasi-currency as part of a raft of reforms to the nation’s foreign-exchange system, according to a central bank official.

Depreciating the so-called bond notes would be an acknowledgment that the official one-for-one exchange rate is no longer sustainable. It would also mark the second major overhaul to Zimbabwe’s currency regime since October, when the central bank ordered lenders to separate deposits of US dollars and electronic money known as RTGS$.

Since then the cash shortage has led to the closing of factories, the more than doubling of fuel prices to the highest in the world and a surge in inflation. Protests in January left at least 17 people dead.

Zimbabwe bond notes

The southern African nation’s official inflation rate has soared to 57% from less than 4% a year ago, though several analysts say it’s even higher.

The Reserve Bank of Zimbabwe may unveil the measures in its Monetary Policy Statement to be announced on Wednesday, said the official, who asked not to be identified because he’s not authorised to speak to the media. Governor John Mangudya was said to be unavailable when his office was contacted.

The decision to adjust the value of bond notes follows submissions by the business community, company officials and individuals about how to formalise foreign-exchange trading in Zimbabwe, the official said. The government supports the move because it accepts the official one-for-one peg to the dollar isn’t working, he said.

There were $379m-worth of bond notes in circulation in June 2018, according to an RBZ statement in October. Deposits of real greenbacks stand at about $600m, the Harare-based Herald newspaper reported Tuesday, citing a central bank official.

Read also: Some Zimbabweans want SA rand as currency

Bond notes trade at 3.61 per dollar on the black market, according to marketwatch.co.zw, a website run by financial analysts. RTGS$ are valued at about 3.75 per dollar, it said.

Zimbabwe introduced the bond notes in 2016 to ease a crippling shortage of cash. Their debut came seven years after the nation scrapped its own currency in the wake of hyperinflation and adopted a basket of foreign units as legal tender.

While the government currently says bond notes are equal to the US dollar, they’re not accepted by foreign suppliers. That’s resulted in payment problems for companies such as gold miners and grain millers. Shops charge customers different prices depending on which unit they use to pay, offering discounts as high as 70% to those who use real US dollars.


Zimbabwe Devalues Its Quasi-Currency in FX Regime Overhaul

By Godfrey Marawanyika, Antony Sguazzin and Paul Wallace

(Bloomberg) – Zimbabwe’s government dropped its insistence that a quasi-currency known as bond notes are at par with the dollar as it overhauled foreign-exchange trading and effectively devalued the securities.

The measures are a step toward trying to create a new currency and stabilise Zimbabwe’s economy, which has been plunged into crisis as a shortage of foreign currency stoked the fastest increase in consumer prices in more than a decade and caused shortages of food, fuel and medicine. Zimbabwe abandoned its own currency in 2009 after inflation spiralled to 500 billion percent, allowing the use of the US dollar and other units as legal tender. Bond notes were introduced in 2016.

The central bank will immediately establish an interbank foreign-exchange market in which the bond notes will be denominated as electronic money known as RTGS dollars, Governor John Mangudya said at a briefing Wednesday in the capital, Harare. While the government has previously insisted that bond notes and RTGS dollars are worth the same as US dollars, the units currently trade at between 3.66 and 3.8 to the dollar respectively on the black market.

Denominating bond notes as RTGS dollars will “establish an exchange rate between the current monetary balances and foreign currency,” Mangudya said. “The new framework is set to bring certainty, predictability and functionality to the economy’s foreign-exchange market.”

‘Effective devaluation’

The announcement amounted to an effective devaluation, Harare-based economist John Robertson said.

“He didn’t mention it by name, but they have devalued it,” he said. “We should now see a convergence of a stable rate going forward. Buyers and sellers will now need to meet and agree on a rate.”

Mangudya said that under the new system introduced on Wednesday:

  • RTGS dollars would be used by all entities including the government to price goods and services
  • The use of RTGS dollars would eliminate the existence of a multi-pricing system; prices should either remain at their current levels or decline “in sympathy with the stability in the exchange rate”
  • The central bank has arranged “sufficient lines of credit” to enable it to maintain foreign currency to underpin the exchange rate Foreign currency from the interbank market will be used for foreign-payment invoices

New currency

“It is a small but key step that will support a long road of reforms needed to bring transparency and clarity to the country’s monetary system,” said Chiedza Madzima, a senior analyst at Fitch Solutions in Johannesburg.

The refusal by foreign traders to accept bond notes as legal tender resulted in payment problems for companies such as gold miners and grain millers and exacerbated shortages of raw materials. Shops also charged customers different prices depending on which unit they used to pay, offering discounts as high as 70% to those who used real US dollars.

The central bank measures are a step toward Zimbabwe reintroducing its own currency, Secretary for Information Nick Mangwana said by phone. Finance Minister Mthuli Ncube has said he wants a new currency introduced within a year.

“The move is largely constructive as the government now officially recognises that US dollars and RTGS$ are not at parity,” Neville Mandimika, an analyst in Johannesburg at FirstRand Ltd.’s Rand Merchant Bank, said in response to emailed questions. “The introduction of a Zim dollar will be just in name, but the RTGS$ is essentially the Zim dollar.”

Ncube has given few details on plans for the new currency, beyond that the central bank was building reserves, which currently cover barely two weeks of imports. He’s also trying to restructure billions of dollars of defaulted multilateral debts so that Zimbabwe can obtain new international loans.

While a new currency is possible, it’s likely to behave the same way bond notes and RTGS dollars did, said Steve H. Hanke, a professor of applied economics and expert on hyperinflation at Johns Hopkins University in Baltimore. Both units depreciated against the dollar after their introduction.

“It would sink like a stone,” he said. “They have created such a mess with the bonds and RTGS dollars. What they should do is get this cancer out of the system.”