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Dr Mangudya

Conrad Mwanawashe : Business Reporter

Reserve Bank of Zimbabwe governor Dr John Mangudya mentioned the phrase “trust and confidence” more than six times in his 85-page Mid-Term Monetary Policy Statement delivered last week. Dr Mangudya has always emphasised that the restoration of public confidence was “vital and imperative”. No wonder he themed his monetary policy; “Walk the Talk to Restore Trust and Confidence”.The RBZ chief faces probably one of his most challenging times since he assumed office two years ago. And the issue that is probably giving him sleepless nights is none other than the introduction of bond notes into the economy. However, Dr Mangudya is convinced that the measure to introduce export incentives in the form of bond notes will solve a number of challenges that Zimbabwe is currently facing.

He argues that the introduction of an export incentive scheme of up to 5 percent to promote the export of goods and services will help sustain the economy’s capacity and ability to generate foreign exchange to meet its domestic and foreign requirements. Dr Mangudya believes that the export bonus scheme to be awarded to exporters of goods and services will address the challenges of low productivity and promote exports with the overall aim of liquefying the multi-currency exchange system.

The funding mechanism of the export incentive scheme will be through bond notes in order to preserve the offshore $200 million counter-cyclical facility that has been arranged with Afreximbank to support the export bonus scheme from externalisation and/or capital flight which has continued to negatively affect the economy since dollarisation in 2009. The bond notes will be zero-coupon, tax-exempt debt instruments.

The fundamentals of the export incentive scheme and the features of the bond notes have been discussed in greater detail since their announcement. Debate has raged, however, on a few fundamental principles raised by the transacting public, industry and economists, bordering on the legality of the bond notes, among other issues. Some of the issues that the RBZ has to contend with include;

Trust and confidence

Hyper inflation — maintaining the bond notes’ intrinsic value

Difference between bearer cheques and bond note

Transparency with issuance of the bond notes

Operationalisation of the system

Cash shortages

Money laundering and externalisation

Trust and confidence

In one of his hit songs titled “Messenger”, reggae musician Christopher Martin sings that “So if you don’t trust the messenger, why would you trust the message?” This is the most critical challenge Dr Mangudya has to address for the bond notes to gain traction.

The export incentive measure, to culminate in the introduction of bond notes faces trust issues. Not solely because Zimbabweans do not trust the bond notes but the messenger. And this does not refer to Dr Mangudya as an individual but the institution of his office.

Addressing issues of trust requires a few proactive steps from the RBZ including improving its communications and publicity strategies. The developments in the digital and social media world means that anyone with mobile phone which accesses data can generate and disseminate messages. A campaign on the social media against bond notes, flout with distortions has been running for while on the social networks and the central bank should step up to the plate.

With one month before the first tranche of bond notes is released the RBZ should increase publicity as to the features of the bond notes, the reason for their introduction and modalities of operation. This might pacify a few people.

Quantity of the bond notes to be introduced into the system

The publicity should also address the differences between the bond notes and the bearer cheques of 2008. The bearer cheques were printed locally, without an offshore facility backing them, without a limit/cap on the total printed and importantly were not tied to any activity. The bearer cheques were also not related to any currency in terms of exchange rates.

On the contrary bond notes are tied export as the economic activity. Their issuance and printing is relative to the amount of exports. And given that everyone knows the percentages and levels of exports, anyone can quantify the amount of bond notes in circulation. Also, the bond notes are backed by the $200 million Afreximbank facility, bringing in an international bank to monitor their printing.

The $200 million offshore facility means that the bond notes are tied to the value of the US dollar meaning that they track the US dollar movement. Therefore, intrinsic value is not lost. About $75 million worth of bond notes are expected to be introduced by the end of the year.

Transparency with

issuance of the bond notes

All these features will be monitored by an independent body to be set up by the central bank. Setting up the independent board before the introduction of the first tranche is key.

Furthermore, the appointment of board members on the commission should be done above board. New faces and from different sectors would help bring some confidence and trust. Recycling characters may not help achieve the intended purpose.

Hyper inflation fears

The RBZ should be aware of the mammoth task it faces to convince the transacting public that the introduction of the bond notes will in no way lead to hyper inflation.

In several meetings and addresses he has argued that the level of bond notes to be introduced would not have a significant effect on the money in circulation and

therefore not enough to lead to inflation.

These fears emanate from the 2008 situation when the Zimbabwe dollar lost its value leading to it becoming moribund.

Past experiences are still etched in the minds of many people.

Liquidity to improve

It is critical to note that since the bond notes are legal tender only in Zimbabwe, this may mean that circulation will improve. It will make transacting easier. This may also lead to the disappearance of the bank queues that have characterised the country over the last few months.

The cash shortages were attributed to the dysfunctional multi-currency system as a result of using the strong United States dollar and because the USD has become more of a commodity, a safe haven currency or asset than a medium of exchange.

Externalisation reduced — but other measures necessary

The bond notes are most likely to operate as one measure to counter externalisation and money laundering. The fact that they are acceptable only in Zimbabwe kills appetite for those wishing to move money across borders.

The RBZ is currently working with other state agents to tighten screws on money laundering and externalisation.

Government, through the National Prosecuting Authority has established a unit dedicated to prosecuting Anti-Money Laundering offences which will work closely with the Bank Use Promotion and Suppression of Money Laundering Unit in the Reserve Bank, as well as with the police as part of steps to implement the National Anti-Money Laundering and Combating Financing of Terrorism Strategic Plan for 2015–2018.

Operationalisation of the system

When all is said and done, there should be mechanisms to ensure that service providers accept the bond notes at “no questions asked” basis. Also, no premium should be put on transacting with the bond notes.

The RBZ may not be in control of the black market system but mechanisms to ensure that there are no unscrupulous dealings with the bond notes are critical.

Trust is earned and the central bank has work cut out for it to earn it.