The hazards of prematurely scrapping bond notes

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by removing bond notes, Zw would be debasing a credible benchmark of productivity and output

CHRIS CHENGA

In times of governmental transition, particularly in respective portfolios, there is an enthusiasm for new incumbents to bring in their own policies which are often distinct from their predecessors. This poses the risk of hazardous policy discontinuity. It may seem counter intuitive for a new incumbent to retain cognizance of their predecessors’ policies especially when they may very well be in disagreement with those policies. But, an abrupt change in policy is of greater long term risk to an economy. This is due to the structural disconnect between new interventions and the policy residue from a predecessor’s time. Such an error can be made when considering an abrupt scraping of bond notes. The issue of bond notes is largely structural one, than merely being a monetary matter of which currency the economy uses. The necessity of retaining bond notes, a monetary instrument that pegged at parity to the US dollar, can be structurally justified in the near term. The resolution can begin from the broad distain agitating the scrapping of the surrogate currency.

There is a sentiment of skepticism as to whether or not incomes and savings will retain credible parity to a US dollar. This is the main worry. Ever since dollarisation, citizens and business stakeholders in Zimbabwe have been primed that their productivity and real yields can be at parity to the US dollar. The advent of bond notes showed them that this was not the case, and that the Zimbabwean economy had structurally failed to retain such structural balance of productivity and real yields. Thus the incomes and savings within Zimbabwe’s monetary system were in fact no longer at parity to the US dollar.

Bond notes were not the cause of these structural imbalances. They were just the most evident indicator. This is still true today. Disgruntled citizens and business stakeholders desire a conviction that the official peg of parity to the USD is substantively true. But it cannot be so without attending to structural imbalances in productivity and real yields. To satisfy this citizen and business stakeholder expectation, the continued use of bond notes in the near term is actually the best structural measuring stick as to whether or not the economy can competitively work back towards such productivity and real yields. The more the official peg of 1:1 is stressed, creating larger spreads with the parallel rate, this should tell citizens and business stakeholders that structural imbalances are worsening, or more vulnerable to the arbitrage opportunity of foreign currency shortages. The opposite is also true. When the parallel rate spreads are squeezed, it tells that structural imbalances are easing, closing down arbitrage opportunities due to greater foreign currency inflows.

Bond notes function as a currency board, which objectively tries to regulate the amount of domestic money supply to a traceable amount of foreign currency facility to back it. This acts as a control for an economy to attend to its structural imbalances that may lead to aches such as bank runs, inflation, or unmitigated commodity shortages. These are all credible threats to the economy at the rate of structural compromise that the Zimbabwean economy was going prior to the introduction of bond notes. Granted that much of this structural compromise could be traced to governmental imprudence, it is subjective how much trust one could have placed on market forces for foreign currency to avert bank runs, inflation or commodity shortages. Risks that still exist today; it is also hard to refute that the RBZ’s greater regulation of domestic money supply and foreign currency allocation, anchored on bond notes, has helped control all aforementioned risks to respectable extent.

Perhaps then, the only query to sustaining bond notes is whether or not the government and central bank have put into domestic circulation surrogate currency that is truly matched by the foreign currency facility to back it. This, however, is a question of stewardship in who is implementing, not one of the instrument itself. Hopefully, prospective policymakers can start to look a bond notes in this manner. (Honorable Professor Mthuli Ncube, after time of print)

Citizens and business stakeholders can also think of bond notes in a proprietary context. If a citizen or business has $1,000 in an account, officially the bank is liable to USD$1,000, of which some clients, especially corporate account holders, actually get to withdraw. If policymakers scrap bond notes tomorrow morning, the $1,000 will then likely drop to the informal rate assuming a new currency is free floating, or it could be much lower. The bank will also then be officially liable to the citizen or business for that figure, way down from the USD$1,000. This is rationally undesirable from a proprietary standpoint; in effect a devaluation of their income and savings. While the bond note is officially pegged, as it is today, there is room for structural interventions to re-earn the pegged value of citizen and business stakeholders’ accounts. Income and savings can then be backed by the productivity and real yields that initially gave them short term claim to being at parity with the US dollar.

Rather than desire the removal of bond notes, citizens and business stakeholders should hope that prospective policymakers, particularly the incoming Minister of Finance and Economic Development, puts in place policies that gain back the value of bond notes to USD first, then maybe scrap bond notes in years to come! These structural interventions are still within reach, and that is where prospective policymakers should exert their creative efforts. Citizens and business stakeholders as well should utilize the benchmark that is a pegged bond note as a measuring stick for how well any incoming policymakers can incite structural rebalancing that drives up productivity and real yields in our economy; this is the true challenge for policymakers.