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Bond notes

Tinashe Nyamunda
I moved around Harare CBD observing how people are making do (kukiya-kiya). I was perplexed at how quickly they have adjusted to the bond note economy. How they are trading with it in inventive ways and exploiting any opportunity to make a quick buck is remarkable. Someone explained to me how they are buying a carton of sugar at $17,50 bond and selling it at US$13 . . . just slightly under the purchase price.

Apparently, they then sell the foreign exchange in physical cash to desperate importers who transfer the proceeds of the sale to them at a premium of 30-35 percent.

This transferred money (a novel form of kuburner) is then used to make more purchases allowing them to replenish the stocks and start the process all over again.

As their volumes increase, they get a healthy profit. So instead of just facilitating exchange and easing the liquidity shortage, the bond note has become a prime target of increasingly speculative activities in different ways, as in the example given above.

Although the introduction of bond notes eased cash liquidity problems to some extent, and the Reserve Bank of Zimbabwe (RBZ) continues to be cautious not to stimulate inflation by injecting plenty of notes into the market, I get mixed signals from people about the current experiences and prospects of bond notes. On the basis of my observations, I will share some perspectives about Zimbabwe’s prospects.

FinX once moved a comment on how arbitrage will create mispricing. For the purposes of this article, I will paste the comment: “Zimbabweans, as we well know, are good at lying to themselves as well as each other with their statements on “being educated” and what the real impact of the bond notes will be. It’s one word – “arbitrage”. Arbitrage creates mispricing and mispricing allows some people to make a lot of money while the greater majority generally get poorer.

Although there is an impression that bonds notes have managed to maintain their general circulation value, even at par with the US dollar, I am concerned about their exchange value against foreign currency among importers and the arbitrage taking place. When making certain ordinary purchases, I have been using the bond at par with the dollar.

I purchase airtime, ice-creams and other trinkets from vendors and other SMEs and grocery businesses where much of the money is circulating, including an estimated $86 million bond notes. However, determining how much of the US$ is circulating is very difficult.

Nonetheless, at a closer look, one needs to fully appreciate all the nuances that inform what makes up the bond economy. Whereas Statutory Instrument (SI) 64 was implemented to substitute imports of goods that could be locally produced and aid RBZ exchange controls in saving foreign currency, its effects have also been mixed.

The manufacturing industry has responded positively to SI 64 as many food processing industries such as Zim Gold, Cairns, Nestle and others are reportedly enjoying a steady increase in demand. In fact, according to the CZI, industrial capacity utilisation has risen from around 20 percent to 47 percent.

If this can be sustained, money made by local companies can benefit the local economy through creating liquidity, expanding the capital base and gradually creating jobs.

Just walk into Bhadhella, Mahomed Mussa and other formal wholesalers; you can swipe your debit card or use the EcoCash facility to make transact or purchase goods. If this is maintained across the economy, a very positive effect can be anticipated.

However, the economy has continued to operate irregularly and in ways that the State failed to anticipate or plan for.

There is a very vibrant parallel economy that strives on imports. The pseudo-wholesalers, largely known as “tuckshops”, which are largely located downtown around the Charter, Rezende and adjacent streets operate a thriving smuggled goods economy with impunity right under the noses of the state.

The products that they sell are smuggled into the country under the noses of law enforcement agents and revenue authorities, making their way from the borders to the main city centres where they are openly traded in spite of the existence of SI 64.

How they are smuggled is an open secret. So, in spite of the State’s appearance to be implementing import controls to stimulate local industry whose capacity has been questioned, the smuggling economy’s modus operandi is hidden in the plain view.

All traders, particularly SMEs at the very bottom of the value chain, then benefit from these products sold at very marked down prices that compete with local products.

Therefore, this undercuts the benefits that can accrue to local producers. Yet many of these “tuckshops”, never mind the deceiving name as they sale well above what can be deemed “tuck”, are un-licenced and contribute very little towards taxes. Many of these businesses represent the highest form of what Janet Roitman termed “fiscal disobedience”, not paying tax, licenses and import duties.

Consequently, the benefits of SI 64 are at best limited and inadequate to contain imported, creeping inflation. This is because the “tuckshops” survive on selling goods that formal wholesalers such as Bhadhella and Mohammed Mussa do not necessarily specialise in or do not stock; goods which require a lot of foreign exchange.

The “tuckshops” phenomena proliferated as the country’s economy largely became informal, a key characteristic of what former Finance Minister Tendai Biti termed “supermarket economy.” The country became predominantly consumptive but very unproductive, indicative of severe economic decline.

Although some offer smart-cash facilities, the majority of these enterprises thrive, not on plastic money, bank transfers or mobile banking through EcoCash, but run/operate on cash.

They especially depend on foreign exchange, often demanding half of the currency of purchase from their customers to be denominated in foreign currency.

Worsened by outright externalisation of foreign currency by certain elites and other people as reported in the media, it is little wonder that foreign currency is fast disappearing from the banking sector and is increasingly becoming monopolised by these traders.

It may be among them also that the first foreign exchange traders and cash barons characteristic of yesteryear may re-emerge. This is where the SI 64 initiatives and exchange controls are compromised. But is this really a bad thing, or is it indicative of a more profound problem: The failure of the State to plan, police and coordinate productive and sustainable policies?

An anthropologist who works in West Africa, Jane Guyer recently published an interesting paper on the “hard-soft currency spectrum”. She describes how local African currencies, former assemblages of the major world currencies, struggle to retain their international exchange value especially because of the structure of their economies which are extractive based but also characterised by a predominantly consumptive behaviour.

As such, because of their compromised exchange capacity of the local currencies on global money markets, these “soft currencies” injected into the market as legal tender tend only to be used in local transactions. But the foreign exchange that is used in transnational transactions tends to have a higher demand on the market.

In Zimbabwe’s case, “tuckshops”, are much keener than local small business people and ordinary everyday traders to have foreign exchange instead of bond notes. In fact, many of these wholesalers are now demanding half or more of the cash payment to be made in foreign exchange, particularly the US dollars.

Thus, existing outside of the formal structures of the State where they require import licenses and need to apply for foreign exchange to import goods that are listed under SI 64 anyway. They utilise the informal channels to maintain their own parallel economy. Ironically, all of this is happening under the clear purview of the authorities.

It’s also happening as many business-people are struggling to access Point of Sale (POS) machines from the banks. Only those with access to POS machines can benefit from clients struggling to access cash from the banks. They, thus, have to balance up forms of payment at their tuckshops if they are to remain competitive with established wholesalers where plastic money is accepted.

So, locals have used bonds notes as the soft currency for local transactions whereas most people are retaining harder currencies for transnational business. The thinking is that one saves US dollars, but quickly disposes of bond notes.

Alternatively, one can use bond notes where they are accepted, but keep dollars for purchases where the local notes are not. Even some traders are marking their prices higher where they are denominated in bond and lower in cases where they are encouraging dollar purchases.

In short, the bond notes currency is on the soft side of the spectrum held in contempt by traders while the US dollars are increasingly sought after.

The result of this bond note-US dollar spectrum does not require too much imagination in forecasting.

With more importance attached to foreign exchange, this has provided a vent for surplus among currency dealers who are charging a premium on the foreign currency. Currently, the loose exchange rate of bond to dollar is an average of B$108 equivalent to US$100.

Whether this differential will remain stable is difficult to determine. Even if harvests have reduced the need for certain food imports in the country, the hard-soft currency differential will widen. This is largely driven by a misco-ordination among government ministries which do not cooperate in policing the economy.

There are disparate voices on economic issues from relevant ministries responsible for different sectors of the economy. The Zimra, police force, Ministries of Finance and Industry among others have all failed to coordinate their efforts in order to protect and sustain SI 64 and make exchange controls sufficient.

So, in spite of the efforts by the Government, their main challenge is how to incorporate the informal sector, tuckshops and other stakeholders in their vision of economic recovery. These groups hold much of the currency in circulation, most of which remains unbanked.

Yet the responsibility of confronting these challenges has largely been left to the RBZ alone, which has very limited capacity to police, monitor and attend to the deficiencies of policies passed by a poorly coordinated government.

As foreign currency becomes even scarcer, and as long as the tuckshops are allowed to dominate the smuggled goods market, both SI 64 and the bond notes initiatives may eventually collapse. It is from these unregulated, unmonitored and uncontrolled elements of the economy that inflation will be imported or rather smuggled into the country to eventually intensify, unless the Government takes up its role and engages the relevant stakeholders in national development and try as best as possible to coordinate their policy efforts. – This article was first published on finx in March 2017.