Debate on bond notes rages Dr Mangudya

Victoria Ruzvidzo Business Focus
Reserve Bank of Zimbabwe Governor Dr John Mangudya did not mince his words a fortnight ago as he presented his Mid-Term Monetary Policy Statement when he insisted that bond notes were coming despite the seeming resistance by those who feel the notes will spell disaster for an already challenged economy.

He said he would not force people to use them but made it clear he remained unperturbed by calls for him to abandon this path. He stressed that he had taken into account some market fears by ensuring the notes would be introduced in small denominations of $2 and $5. Bond notes equivalent to $75 million would be introduced in the market by December.

Dr Mangudya insisted this was largely a funding mechanism of the export incentive scheme, although many remain suspicious that the bond notes spell the introduction of the Zimbabwe dollar via the back door as they say.

These developments have inadvertently caused uncertainty in the market to the extent that a number of savings projects have been suspended as they await the introduction of the bond notes so that they assess the impact first the while creditors both individual and corporate, have introduced clauses that demand debtors to pay back dues strictly in US dollars even when the bond notes become available.

Some investors have also decided to sit on the fence so they can ascertain the impact of the bond notes before they can invest.

But there are others who feel it is still business as usual.

Assurance by monetary authorities that the bond notes will have the same value as the greenback have generally failed to assuage fears of transaction losses by individuals and institutions alike.

However, the debate that continues to rage on the benefits or otherwise of introducing bond notes is healthy but only in as far as it is progressive. What is required is genuine advice and submissions to the authorities or constructive criticism that will help the monetary authorities panel beat the scheme while being watchful of any unintended negative outcomes.

Given the continued discussion on the subject, it is also not harmful for the central bank to embark on an outreach programme over the next few weeks to sensitise the market about the benefits of the bond notes and the export incentive scheme they are meant to sustain.

I remember when bond coins were introduced Dr Mangudya took time to meet with commuter omnibus operators and retailers to explain their use and dispel fears that people would lose their “real” money if they transacted in bond coins. Similar initiatives would help the situation.

Furthermore, it is also critical to listen to the concerns, as alluded to by the governor himself so that loopholes are plugged before introduction if that is the best option the country has. The economy has become quite vulnerable and sensitive hence any policy implementation has to be well-thought-out and introduced smoothly to ensure soft landing and buy-in.

This week I will give space to Lammer, a local banker who has put across his thoughts on the bond notes:

How to create demand for Bond notes
So much has been said for and against bond notes such that no one has attempted to take the middle of the road approach driven by what will really benefit me , the man on the street.

The man on the street is afraid that the ZWD will return and justifiably so but at the same time he has been hardhit by the illegal externalisation of USD by dealers. It will also be foolhardy for the Govt to abuse this privilege and over print these bond notes.

The Govt has become too technical they have forgotten to communicate with the man on the street. Surely how do I explain 5 percent Exporters Incentive to my mum farming in Glendale under the resettled farmers programme when I don’t even know how it will work.

Bond notes can work

The Government, as the biggest spender and collector of taxes, can structure bond notes such that they won’t owe anyone any apology or explanation. Here is how:

1. Bond notes as Govt currency: – Introduce bond notes as a Government currency, not national currency. This means that the currency will only be recognised when transacting with the Govt.

For example, Innscor, Delta or Econet can apply to RBZ to issue own currency that will be acceptable by its debtors and creditors in its own closed economy.

I mention those three because I once advised them to do that to help alleviate the liquidity situation.

2. To address the supply side: – all suppliers of Govt services and goods will be paid in bond notes (or partially in bond notes).

All direct deductions from Govt payroll will be settled in bond notes ie medical aid, loans, funeral policies etc. These measures are a sure and effective way of introducing bond notes into circulation than the export incentive something – maybe because I do not understand it. Everyone will kill to do business with Govt on Govt terms.

3. To address the demand side: the Government only need to implement the following measures. All or a percentage of income tax, PAYE and VAT will be payable in bond notes. The percentages will be influenced by monetary policy as Govt seeks to regulate supply and demand.

All Govt institutions and local authorities to start charging 100 percent or partly in bond notes. Eg passport office, toll gates, municipalities. Retailers (eg supermarkets) will be forced to accept bond notes since they will require them to pay VAT and PAYE for their staff.

4. Managing over-reliance on the USD: To manage the impact of the strong currency on our economy, the Govt should charge and collect import duty using

a. Country of origin of the goods or

b. the currency of the neighbouring country at the port of entry to the extent that it is in the multi-currency basket

c. Lastly USD

For illustration, imports from Zambia will be charged in USD but those from South Africa will be charged in rands. But if any of these have originated from UK, then they must be charged in pounds.

5. The hard part: when you have issued a Govt currency you must be bold enough to have banks open a separate account for it unless you intend on abusing that privilege. This is where confidence is being lost.

No sane citizen will allow Govt to print bond notes and integrate them with USD without being accountable to anyone.

The Govt must print amounts that are driven by their own supply and demand ie the bond notes in circulation should be the lower of payments by Govt and collections through taxes. This way the value of bond notes can be kept in check. Imagine tax payers running from bank A to bank B in search of bond notes to pay taxes because they are in short supply or having to actually seek dispensation to pay in USD because they couldn’t raise enough bond notes.

6. Positioning: let us find a better name for this Govt currency. Positioning is everything.

With these measures, the Government won’t owe anyone any explanation.

The rule will be simple and that is: when you deal with us, play by our rules.

We all know what could happen if the Government then prints more USD than can be absorbed back through taxes. The rest I leave to economists.

In God I Trust

My email:[email protected]. Whatsapp: +263 772129972

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