Tuesday, November 15, 2016

Bond Notes

From: John Date: Sun, 13 Nov 2016 15:13:39 +0200 Conversation: Prospects Subject: Prospects The need for imaginative policy decisions grows more urgent by the day, but nothing tangible can yet be reported. From this statement, you will gather that I do not believe the bond note exercise will provide any of the needed answers. However, I do hope that the attached thoughts will be of some assistance. I look forward to being able to describe policy changes that will actually help before too long. Kindest regards, John

Thursday, May 19, 2016


From: John <JMRobertson@umaxlife.co.zw>
Date: Wed, 11 May 2016 09:46:25 +0200
To: <patrice.laquerre@international.gc.ca>
Conversation: RBZ reconsiders currency mix
Subject: FW: RBZ reconsiders currency mix

Partial Rethink

The following reports on an amendment to the initial proposals on the mix of currencies and on controlling the outflow of money. This was published today.

Kindest regards,


Exporters to keep USD receipts - Central bank forced into U-turn - RBZ SCRAPS RAND, EURO PLAN

  • Chronicle (Zimbabwe)
  • 11 May 2016
  • Prosper Ndlovu
THE Reserve Bank of Zimbabwe (RBZ) has with immediate effect scrapped the apportionment of foreign exchange receipts into rand and euros and applied the five percent export incentive in US$ into authorised dealers’ RTGS accounts for exports.

As part of bold foreign exchange management measures aimed at stimulating the economy, the apex bank removed the 10 percent threshold on nostro/foreign accounts balances as well as a 15 percent threshold on cash holdings by banks.

Anchored on the broader need to enhance the ease of doing business, the move is expected to improve exporter viability and competitiveness while further enhancing the spread of liquidity generated from exports of goods and services.

As such, it advised authorised dealers that 50 percent of all new foreign exchange receipts from the export of goods and services denominated in US$ shall be transferred to the Reserve Bank immediately on receipt of funds.

In a statement, the bank said the remaining 50 percent would be credited into the exporters’ foreign currency account (FCA) in US$.

“On receipt of the 50 percent export proceeds into its nostro account, the Reserve Bank shall immediately credit the same amount plus the five percent export incentive/bonus in US$ into the authorised dealers’ RTGS account for the account of the exporter,” reads the statement.

“Accordingly, the requirement for the apportionment of 50 percent of foreign exchange receipts into 40 percent ZAR and 10 percent EUR, has been removed with immediate effect.”

Where the exporters’ foreign currency earnings based on Form CD1 acquittals are denominated in other currencies in the multicurrency basket, said the RBZ, such proceeds shall be credited 100 percent into the respective exporter’s corporate FCA.

“Similarly, the five percent export incentive paid into US$ FCA shall also apply to such exporters on their foreign currency earnings,” it said.

In a bid to facilitate payouts of diaspora remittances, a critical source of liquidity for Zimbabwe, the RBZ advised that money transfer agencies or authorised dealers with limited authority who make cash withdrawals for the purposes of paying r e m it t anc e s , would not be restricted by cash withdrawal limits.

It said the measures would also energise the production and marketing of tobacco and gold, which are key export earners for the country.

With effect from yesterday, the RBZ said all proceeds from tobacco drawdowns or offshore facilities disbursed for purposes of purchases on the tobacco auction floors by merchants would be immediately transferred to the central bank’s nostro account.

Upon confirmation of receipt of drawdown proceeds, the Reserve Bank said it would immediately credit the same amount in US$ to the authorised dealer’s RTGS account for the merchant’s account to facilitate payments to the various beneficiary tobacco farmers’ accounts.

The merchant is also eligible for the five percent export incentive based on the value addition or processing component, upon full acquittal of the Form CD1.

Also included in the foreign exchange priority list guideline are remittances of rental income from properties owned by non-resident Zimbabweans and foreigners who would have purchased properties using offshore funds that have been transferred through normal banking channels.

This also covers remittance of pension income from non-resident Zimbabweans who formally emigrated as well as importation of packaging material not available in Zimbabwe.

The bank stressed the need for dealers to render due diligence and good client services when disbursing cash to these entitities for purposes of efficiency.

The RBZ said the statement has been made in reference to the exchange control directives dated May 5 and 6, 2016, which operationalised the measures announced by RBZ governor John Mangudya last Thursday.

The measures were anchored on the promotion and sustenance of the multiplecurrency system as well as dealing with the cash shortages.

The centre piece of the effort to end the current cash squeeze is the introduction of bond notes of the same value as a US$, which are expected to come into circulation within two months.

Economic news

Economic Developments

Second Quarter, 2016

Bond notes

The Reserve Bank’s statement that, in order to ease the shortage of bank notes in the country, it plans to place exchangeable tokens into circulation by means of a five percent export incentive bonus, has been met with severe misgivings. The so-called bond notes are to be tied to exports of about $250 million a month, so 5% of that amount would place an additional $12,5 million-worth of buying power a month at the disposal of mainly the exporters of gold, platinum and tobacco. Working to a maximum of $200 million in bond notes, these tokens would therefore trickle into the monetary system over a period of 16 months.

It appears that nobody has found this description of the proposal to be either helpful or believable, so the speculations of some observers suggest that a more rapid disbursal of perhaps far larger numbers of bond notes might be made through their use in settlement of maturing Treasury Bills, or to pay other government debts. The Reserve Bank’s statements reject this assertion.  

However, the procedure laid down by the Reserve Bank invites more speculation on the planned seizure of export proceeds. Banks in receipt of all export proceeds in US dollars are now required to credit the exporter’s foreign currency account with only half the amount. The balance will be sent to the Reserve Bank, which will deposit that amount into its offshore nostro account. At the same time, it will extend credit facilities of the same amount, plus bond notes to the value of 5% of the total value of the export consignment, to the RTGS account of the exporter’s bank for the use of that exporter.

The purpose of this feature of the arrangement appears to be two-fold. The first is to reduce the proportion of export revenues being used to pay for imports. Only the half of the exporter’s revenue placed in the company’s foreign currency account will be readily available to pay for imports. To use the credit recorded in the bank’s RTGS account to pay for even more imports, it has to be assumed that approval will have to be sought. If it is granted, this is likely to place the importer into a queue, the length of which will be determined by the imported goods’ position on a priorities list. The apparent intention behind this is to encourage the business concerned to look for and support local suppliers of the needed products. 

Because the US dollars taken by the Reserve Bank will be placed in its nostro account, the second of the objectives must be to enable the Reserve Bank to build up a US dollar balance that it can use to meet external obligations. The most pressing of these at present is the commitment to pay, by June 30 2016, the arrears of $1,8 billion owed to the World Bank, the IMF and the African Development Bank.

However, if RBZ does manage to raise and pay over the $1,8 billion, Zimbabwe will not automatically start receiving IMF facilities. For some reason, government statements on the issue imply the belief that IMF money will be flowing in as soon as the $1,8 billion is paid, but the country will merely qualify to be considered for the possibility that it has recovered enough to handle more debt. To improve its credibility that much, the country will first have to restore productive capacity sufficiently to earn the points needed to show that it can meet additional loan repayments, even while resuming payments on the remaining $8 billion that is still owed on outstanding debts.


Changes of importance made to the indigenisation policy on April 11 2016 helped prevent the threatened closure of the very large number of companies that had not obtained Indigenisation Compliance Certificates by the March 31 deadline. A Presidential Statement effectively rendered null and void the various Indigenisation Ministry declarations that companies failing to achieve compliance would have their operating licenses revoked.

This is significant, as a few weeks earlier, in the March 22 Cabinet meeting, the ministers unanimously passed a resolution “directing that from 1st of April 2016, all line ministries proceed to issue orders to licensing authorities to cancel licenses of non-compliant businesses in their respective sectors of the economy”.

However, that same cabinet meeting abandoned the levy that had been proposed as a penalty. This was to have become payable by all companies that had yet to meet the 51% indigenisation target, but its removal was a good indication that policy changes were in progress.

The subsequent Presidential Statement confirmed that a significant revision of the government’s position a week earlier had taken place, even though the very first line of the Presidential Statement states that the intentions of the policy are to “empower historically disadvantaged indigenous Zimbabweans, and to grant them ownership and control of the country’s means and factors of production”.

What remains in place, therefore, is the President’s belief that rights of ownership can be granted, or that business assets belonging to corporate bodies remain freely available for confiscation and redistribution. The President claims that conflicting interpretations of the policy have led to confusion. In reality, however, investors are not at all confused. They are inherently and unequivocally opposed to policies that grant ownership and control of their business assets to anyone else.

Most of the confusion has come from efforts to make an unworkable policy work, compounded by the frequent rehashing of compliance demands. Each change has involved more bad ideas that make more changes inevitable. Then, more confusion was generated by equally inevitable speculation.

The latest uncertainty has been reinforced by the closing line of the Presidential Statement: “To the extent that the Indigenisation and Economic Empowerment Act may not sufficiently conform with this policy position, I have directed that the Law be amended or changed forthwith accordingly.”

As amendments to Acts have to go through Parliament, the assumption has to be made that the President believes his Directive has already determined the outcome of yet to be debated Parliamentary motions. Of interest, the Presidential Statement does not refer to the Minister of Youth, Indigenisation and Economic Empowerment’s claimed power to force the closure of companies and neither does it recognise the powers, claimed by the Ministry, to fine or imprison directors who fail to comply with indigenisation regulations. Both of these are at odds with the President’s new approach.

His Statement also contains an amended list of the Sectors Reserved for Indigenous Zimbabweans. Of special importance, Agriculture: primary production of food and cash crops, which formerly headed the Reserved Sectors, is no longer on the list. Official statements appear to have been careful to avoid drawing attention to this change.

However, revisions to the indigenisation policy affecting the Reserved Sectors appear unlikely to reassure the business community, or encourage hesitant foreign investors, even though just how strongly the ring-fences will protect indigenous businesses from competition in the remaining eleven Reserved Sectors is now also in doubt. A provision allows line Ministers to grant special dispensations to persuasive non-indigenous applicants.

Unfortunately, the almost automatic effect of allowing ministry staff to use their discretion when handling applications is to invite them to generate additional fees for themselves in exchange for ensuring quick and favourable responses. These will add to the already very high costs of establishing a business, but for those in business already, the challenges of remaining in operation have also become more expensive. Changes affecting indigenous as well as non-indigenous investors now include having to seek approvals for renewals of existing licences and permits, and many additional renewable licence requirements have been imposed. Many of these renewals are also to be granted or denied at the discretion of ministry officials.

Indigenisation and Banking

Banks and financial institutions have been effectively removed from the indigenisation debate by the simple statement that the banking sector will “continue to be under the auspices of the Banking Act, which is regulated by the Reserve Bank of Zimbabwe.” Similarly, the Insurance Sector will continue to be under the auspices of its own Act of Parliament. The implication carried in the wording of the Presidential Statement is that these Acts supersede the Indigenisation and Economic Empowerment Act and these institutions are therefore not subject to indigenisation requirements.

However, these institutions, the President says, will “be expected to make their contributions by way of financing facilities for key economic sectors and projects, employee share ownership schemes, linkage programmes and such other financial empowerment facilities as may be introduced by the Reserve Bank”.

Mining and Natural Resources

Mining companies and other businesses relying on natural resources will benefit from a major change that drops all reference to a handover of 51% of the shares of existing companies. Instead, the emphasis is placed on the need for these companies to ensure that their payments for locally supplied goods and services absorb not less than 75% of their total revenue from the of the sales of minerals or other products.

As these payments will include wages, salaries, taxes, royalties and the costs of everything procured from local suppliers, it is likely that almost all of these companies are already meeting that requirement. Just the total cost of employment for most mining companies is likely to come close to that figure, most of the time, as this total would include the costs of housing, medical and education services for mineworkers’ families plus the costs of safety equipment and protective clothing, as well as direct wage payments. Additional local expenditures would include charges for electricity, water, staff training costs and all the taxes, royalties and fees paid to central as well as local government and rural councils. 

On new mining companies, the President, said that, as they would be exploiting depleting resources, it was essential that investors accept as non-negotiable the 51% - 49% split in favour of government. The claim that, as the natural resource being mined is owned by the State, the government of Zimbabwe automatically becomes the owner of 51% of every mining company, without paying for any of the shares, also stays in place, as no amendment to this is suggested in the Presidential Statement.

Attempts to use logic, or to offer basic arithmetic facts, to counter this argument, have proved unsuccessful. The government’s proposition rests on an emotional base that it chooses to sustain by rejecting any need to recognise the costs of establishing and running a mine; this supports their line of reasoning that the value of the minerals sold constitutes the entire topic.

However, mining establishment and operating costs are substantial. They have to be met well in advance by the investor and recovered eventually from the sale of the minerals. Despite this, investors are being told that they will be permitted a return from only 49% of their total investment and that this sum will be heavily taxed.

Because this arrangement will almost certainly prohibit the recovery of development and running costs, no new mines of any importance are likely to be developed in Zimbabwe before government either agrees to pay for its shares, or allows this policy to be negotiated out of existence. A new policy could be formulated on the entirely supportable basis that, while other countries need the minerals, Zimbabwe’s most important needs are employment, skills transfers, export revenues and tax revenues.


In the indigenisation debate, the Empowerment facet of the policy is failing most spectacularly. In the six years since Statutory Instruments brought the Act into operation, tens of thousands of jobs have been lost and perhaps more than that number have been prevented from being created.

With local manufacturing production falling, employment has declined further and dependence on imports has increased, but shrinking domestic wage payments have impacted on local spending power. A significant proportion of the population now depends on remittances from family members, working mostly in neighbouring countries, but the weaker exchange rates of all these countries have reduced the values of the Diaspora inflows. Consumption patterns have moved down market as a result and the sales of many products have become dependent on innovative packaging to cater to the needs of customers who can afford only smaller units.

The most important form of empowerment for the bulk of the populations in any country on Earth is regular, paid employment. Unfortunately, in Zimbabwe the normal job creation process has been put into reverse. The discouraging policies in need of drastic revision appear to be clear enough to everyone, except those in government.

Settlement of Arrears

The timing of the indigenisation policy changes appears to link most closely to the efforts being made to settle $1,8 billion in arrears on external debt repayments. To win support for the efforts being made to borrow the money needed to pay the arrears, government had to assure possible lending institutions at the International Monetary Fund annual meeting, held in Lima in September last year, that economic reforms would be carried out.

These reforms were listed in an External Debt-clearing Strategy paper presented at the Lima meetings. The list included revitalising agriculture, advancing value-adding processes for mining and agriculture, making progress with infrastructure development, strengthening financial sector confidence, accelerating public enterprise reform, improving the management of public finance, and re-engaging with foreign investors. By making tangible progress in all these areas, government believed it would be able to overcome lenders’ reservations and raise the funds needed to pay off the arrears.

Unfortunately, even though the recent IMF mission to Zimbabwe issued a favourable report on the efforts made, the actual progress has fallen a long way short of the expressed hopes. Agricultural output in 2016 has been close to the lowest on record for food crops; many value-adding factories already built for processing agricultural products remain under-utilised; some minerals that used to be processed into higher value alloys are now being exported as low-value concentrates; road resurfacing contracts have taken several years to negotiate and work on the most important has yet to start; work on only one of four power station projects is in progress; many banks are reporting increases in non-performing debts; falling bank liquidity has caused embarrassment to the whole country; a growing list of public enterprises cannot pay regular wages and can offer only seriously restricted services; the public sector salary payments are still absorbing almost all the tax revenues; expenditures on government services are now dependent on deficit spending, which is being funded by the sale of long-dated Treasury Bills, and attempts are only now being made to ease indigenisation demands in ways intended to make the country more attractive to foreign investors.

A preliminary assessment of the government’s achievements was made at a meeting of the IMF’s Executive Board in May, but the reports issued did not suggest that progress had been made on settling the arrears. Several references were made to the severe conditions affecting the economy and the report called for “bold policy revisions”, but these comments appear to suggest that strict conditionality will apply to a new stand-by facility, if one is eventually granted. If the arrears have not been settled by the June 30 2016 deadline, the start of the long process will be further delayed.

Given Zimbabwe’s desperate need for investment inflows and the yet to be bridged gap between investors’ needs and the government’s demands, the IMF is still likely to argue that, as self-inflicted policies remain Zimbabwe’s principal handicaps, these must be removed before the country’s pleas for help can be taken seriously. The changes to the indigenisation policy are likely to be seen as important, but the basic precepts of the policy are still so divorced from investor requirements that only one move would be likely to impress investors as well as the IMF’s Executive Board. That move would be a decision to repeal the entire Indigenisation Act.

The sheer scale of assistance now needed might easily be claimed to qualify the country for disaster relief as, without question, any country that has seen its productive capacity cut by about half, the bulk of its employed population thrown out of work and a quarter forced to leave as refugees, could claim to have experienced a disaster.

However, countries normally qualify for disaster relief only after natural disasters, such as earthquakes or floods. When the destructive forces are man-made and vigorously sustained by those who made them, it is those perpetrators who are disqualifying the whole country from receiving assistance. As any help would be seen to be encouraging bad government, Zimbabwe’s challenge is to demonstrate that a genuine change of course is taking place, gathering momentum and is not at risk of being compromised by deviant political agendas.

The Trade Balance and Liquidity

Having generated the need to import a wide range of goods that used to be grown or manufactured locally, and having lost the export revenues that many of the same goods used to earn for the country, Zimbabwe’s Balance of Trade has been severely negative for many years, as illustrated in this graph. In 2015, imports did decline by almost 6% to $6,002 billion, but as export values fell by 11,7% to $2,7 billion, the trade deficit of $3,298 billion for 2015 was only fractionally lower than the $3,316 billion deficit in 2014. 

As at this date, no Ministry of Finance or Reserve Bank statistics have been released for 2016, so the trade statistics and tax receipts needed for analysis are not available. However, liquidity problems holding up payments and delaying shipments are thought to be important indications of a marked first quarter slow-down in business activity.

In the first quarter of 2016, Press reports have referred to evidence of increased import percentages of basic foods, even maize meal, indicating deepening levels of stress among consumers as well as traders. Government tax revenues in the first quarter of 2016 are reported to have missed their targets by substantial margins, which forced the tax authorities to redouble their collection efforts and to bring inordinate levels of pressure onto the shrinking number of survivors in the business sector.

The causes of the liquidity shortage have been linked to government’s decision to fund an expanding budget deficit, which it has done by persuading pension funds and financial institutions to take up long-dated Treasury Bills. Funds that might have been made available for medium to long-term investments have been captured by government and applied almost exclusively to recurrent expenditures, including salaries.

The direct or indirect use of almost all of this money is on consumer goods, but as almost anything produced in Zimbabwe can be more cheaply sourced from abroad, the bulk of the country’s needs are being met by foreign suppliers. Borrowing for consumption is already serious as it inevitably adds to a growing burden of unproductive debt, but having to spend the borrowed funds on imports is accelerating the decline in domestic liquidity. Increases in non-performing loans are now adding to the problem.

Businesses that are trying to survive are now even more handicapped by the shortages of medium-term capital. The signs that business is being crowded-out by government’s efforts to mop up all available liquidity are escalating by the day and the viability of many businesses is now being threatened by the delayed settlements of accounts to foreign suppliers. Several companies have reported receiving notice of possible suspensions of delivery consignments if timeous payments cannot be assured.

Although arrangements are claimed to have been made to acquire loans that will help recapitalise commercial bank nostro accounts, these funds have yet to materialise. The tightening liquidity is adding to distrust for government and its likely ability to honour its repayment obligations on the maturity of the Treasury Bills. This has prompted the holders of many of these Bills to offload them onto the market at discounts of up to 50%.

Fiscal Reform

Despite the assurances of fiscal reform delivered in the presentations at the IMF meetings in Lima, a build-up of deviations is well illustrated by the deficit spending and the extremely questionable way government has chosen to fund the deficit. Then, in his Independence Day speech on April 18, 2016, President Mugabe appeared to be even more determined to demolish the chances of meeting Lima’s government spending reduction promises by assuring public sector employees that they will get further salary increases this year.

Salary increases will become affordable only if the public sector establishment is reduced very significantly, but government’s declared intention to retain its very expensive retrenchment procedures is keeping the downsizing process on a very slow path. As percentages of both Gross Domestic Product and of government revenue, Zimbabwe already spends more than any other country in Africa on public sector workers’ salaries. This appears set to continue, but at great cost to service delivery.

Another key commitment made in Lima was to assist the revitalisation of agriculture by generating leasehold documents that farmers could pledge to banks as security for loans. As this has been the subject of frequently heated debate for the past fifteen years, the population is eagerly awaiting the outcome of the most recent attempts to prepare bankable documents.

To make the arrangements acceptable, government will have to agree to a private sector-run market structure that will permit foreclosures if farmers default on loan repayments. Formal transfers of the leasehold rights to these properties must be allowed to follow and they must be registered, take place at acceptable, market-related prices and available to anyone who is able to pay. For these conditions to be met, government will have to waive its current stipulation that no such transfers can be in favour of people of colonial stock, from whom these or other pieces of land might have been confiscated.

Food Imports

Agro-processing industry organisations are said to be combining forces to reduce food imports from neighbouring countries. Their proposals, which call for restrictions to placed on import flows, are needed, they claim, because these imports are undermining the viability of local companies. However, the viability of local companies had already been damaged by policies that forced efficient food producers off the land. Accordingly, the reason why food imports are needed is that local production volumes now fall a long way short of requirements.

However, restricting imports will deal only with the symptoms of the problem and the fact that these goods land in Zimbabwe at prices that are lower than the prices of locally produced food is the more important issue. Local costs per unit of output are too high, so removing the need for imports has to be the first step. This calls for massive increases in production at much lower prices. For this, production methods are needed that will deliver the required volumes efficiently enough to yield profits at those prices.

Local costs could be so greatly reduced by improved efficiencies that a large number of other handicaps could be eased, if not overcome. The US dollar’s exchange rate is only one of these and Zimbabwe does not have the option to devalue its way back to profitability. The real problems are low crop yields, too few large-scale farmers, too little collateral to secure the needed finance, extremely weak security of tenure and the country’s inability to keep pace with changes in production and processing methods. All of these problems stem directly from deliberate policy choices that can be changed.

Changes are urgent, but not only in the farming sector. The policies affecting investment in new manufacturing production methods and the inability to properly maintain existing machinery have kept costs high, making local goods increasingly uncompetitive with the cost of their imported equivalents. Companies that have to import raw materials that used to be supplied by local producers face additional costs that also weaken their ability to compete, particularly if their inefficiencies are tied to obsolete technology as well as to erratic electricity and water supplies.

Hopefully, the proposals from the agro-processing industry organisations will argue for the return of large-scale farming operations to restore the effectiveness of economies of scale, recover the dependability of high volume supplies and encourage the inflows of investment capital needed to re-equip and modernise the processing factories. These challenges require the total overhaul of investment conditions to give the country better prospects of attracting the essential capital inflows.

In the initial statement of the Agro-processing industry organisations, the food processors placed the emphasis on maize-meal imports as these sideline the local millers and stock-feed producers. However, the successful imposition of restrictions on already milled products will skirt around the local cost, efficiency and volume issues. When they are addressed, the commercial operators will automatically transfer their support to local suppliers.

Current Trends

Zimbabwe’s Consumer Price Index’s downward trend continued in the first quarter and by April, the meat index reached 87,21, almost 6% lower than in April last year and almost 13% lower than in December 2012, the base date for the Index. Food prices decreased more steeply than the overall CPI index and only fresh produce prices decreased more rapidly than meat prices.

Retail spending has been affected by job losses, delayed wage payments, wage cuts and unpaid debts, all of which have contributed to a distinct downturn in disposable income. In March and April, this was worsened by a growing cash shortage that continued into May.

Falling prices last year and in 2014 were made possible partly because of the weakening rand, but this graph shows that the pressures on the rand eased in January, since when the currency strengthened until early in May. Strong competition between retailers, as well as between the retail sector and the informal traders, has become the more important reason for the falling price levels.

Commodity Prices

On the international markets, commodity price movements have shown encouraging signs of recovery through the first three months of 2016 and the figures in April suggest that the five-year decline might have bottomed out. As the graph shows, that fall had accelerated from mid-2014 through most of 2015, so the very modest respite, just visible in the slight upturns visible in the graph, has been welcomed by commodity exporting countries all over the world.

The improved indications appear still to be under pressure from the very severe debt levels of most of the world’s industrialised countries and the low interest rates – some now even negative – that might explain the continuing low levels of consumer demand.

The claims made by severely indebted governments that low interest rates should stimulate consumption have proved to be misleading. Uncertainties since the 2008 financial crisis made most householders concerned about their existing debt, but falling incomes led to the debt becoming bigger percentages of Gross Domestic Product.

Hopes that the event would prove very temporary initially supported attempts to sustain living standards, but that kept the debts going up without increasing retail sales. So, all major economies today have higher levels of debt than they had in 2007 and total debt around the world, governments included, has grown by $57 trillion. Uncertainties have therefore mounted and the concern shown by most households is being expressed in decisions to spend as little as possible. Unfortunately, debt on this scale poses risks to financial stability and this is slowing the whole world’s recovery prospects.

For Zimbabwe, the gold price has improved to levels that are higher than at any time since the third quarter of 2014. This has been a helpful development, which has supported official efforts to win the confidence of small-scale gold miners and gold panners, many of whom had chosen to smuggle the gold into South Africa for immediate cash payments. Those activities were illegal, but government has now decriminalised gold sales by anyone who is not registered. Estimates claim that several tonnes of gold will be added to annual production figures because of this move.

Platinum prices have also moved up, but by much less than gold. However, the risk that the depressed prices might jeopardise the prospects of Zimbabwe’s platinum producers is now being reassessed as a new refining process has been developed and its adoption in Zimbabwe could reduce the capital costs of building a refinery and even more dramatically reduce the energy requirements for operating the process.

Known as the Kell Process, the method does away with the need for a smelting furnace as the concentrate of the mixture of base metals and precious metals is put instead through a high-pressure oxidation process that first dissolves the base metals. These are drawn off as a solution from which the base metals can be recovered through electrolysis.

The solid oxidised residue then contains the precious metals, and this is put through a roasting plant that prepares them for a subsequent leaching process. This results in another liquid solution from which the gold, platinum and other platinum-group metals can be recovered.

• Electrical energy consumption—84% reduction
• Energy consumption costs—76% reduction
• CO2 - emissions—70% reduction
• Installed power requirement—92% reduction

This development will be important to Zimbabwe, but only if it encourages the opening of many more platinum mines. Platinum-group metal mining has already become the country’s most important source of export revenue and the yet to be agreed adoption of the patented technologies involved will bring forward the date by which the PGM beneficiation target can be reached. Producers using this method will have a significantly lower energy consumption, so installed electricity generation requirements will be much reduced. Compared with the currently used smelting and refining methods, these calculated reductions are said to be the figures shown in the table.

Hopes that the start of the tobacco-selling season would end the liquidity crisis have been somewhat dulled by the increasing proportion of the crop that is being grown and sold under contract. The money loaned by contract buyers to contract growers is sourced offshore and the total proceeds of the first few months’ sales will be absorbed in making repayments to the foreign banks. The smaller proportion paid to the growers who sell their tobacco on the auction floors is likely to remain the only addition to liquidity for most of the first half of the selling season, but for longer than that if average selling prices decline.

Growers have been encouraged by the prices paid in the first weeks and they are hopeful that prices will remain reasonably good. Some of the tobacco delivered has been of excellent quality and early indications have increased market optimism. However, the seasonal difficulties have led to forecasts that the volume on offer might be as much as 15% lower than in 2015, so the total crop is unlikely to yield an increase is export revenues through the year.

Monday, May 9, 2016

Bond notes

------ Forwarded Message
From: John <JMRobertson@umaxlife.co.zw>
Date: Mon, 09 May 2016 09:56:57 +0200
Conversation: Bond notes
Subject: Bond notes

After being engaged in many discussions through the weekend, I remain convinced that, to help arrest Zimbabwe’s further decline, the Reserve Bank’s bond note proposal should be withdrawn without delay. Everyone who can bring their influence to bear on the subject should work for that outcome. The following is a valuable contribution.

A Zimbabwean lawyer, Fadzayi Mahere has offered a legal opinion on the proposal. His opinion was originally posted on the author’s blog and was circulated with the author’s prior permission. The original can be read on this Wordpress link:

Mangudya “creates his own version of the US Dollar”

On the 4th of May 2016, the Reserve Bank Governor of Zimbabwe, Dr John Mangudya issued a press statement wherein he indicated that “the Reserve Bank has established a USD200 million foreign exchange and export incentive facility which is supported by the African Export-Import Bank (Afreximbank) to provide cushion on the high demand for foreign exchange” in the country. The facility would be implemented through the medium of Zimbabwe “bond notes” in denominations of $2, $5, $10 and $20 and would be introduced into the economy in two months’ time. The bond notes are set to operate as an extension of the current family of bond coins, which were introduced in December 2014 to address the challenge of obtaining small change in daily transactions. The Reserve Bank Governor further introduced a limit on daily cash withdrawals with the public now only able to withdraw a maximum of $1 000, €1 000 and R20 000 from their accounts, with immediate effect. He stated that the bond notes shall continue to operate alongside other currencies and at par to the dollar. Dr Mangudya  further announced that, with effect from today, 40 percent of all new US dollar receipts will be converted to rand, “in order to restore and promote the wide usage of currencies in the multicurrency basket.”

Following this press statement, the media has been awash with possible economic justifications for the decisions made by Dr Mangudya. There has also been a public outcry with most fearing a return to the hyperinflationary chaos that characterized the 2007 and 2008 era in Zimbabwe. However, missing in the discourse is a consideration of the legality of the announcement and proposed measures by the Governor.

I wish therefore to offer my legal perspective here.

Applicable Law

The office of the Governor of the Reserve Bank of Zimbabwe is established in terms of section 14(1) of the Reserve Bank of Zimbabwe Act [Chapter 22:15]. In terms of section 68 of the Constitution, the supreme law of the land, every (Zimbabwean) person has a right to [administrative] conduct by the Reserve Bank Governor that is inter alia lawful, reasonable, proportionate and both substantively and procedurally fair. His constitutional duty in this regard is echoed in section 3(1) of the Administrative Justice Act [Chapter 10:28]. According to section 3(1) of the Administrative Justice Act, “an administrative authority which has the responsibility or power to take any administrative action which may affect the rights, interests or legitimate expectations of any person shall act lawfully, reasonably and in a fair manner.” The term “administrative authority” is defined in section 2 of the Administrative Justice Act to include any person authorised by any enactment to exercise or perform any administrative power or duty. The Reserve Bank Governor, being the officer responsible for the day-to-day management, control, administration, operation and direction of the Bank in terms of section 19 of the Reserve Bank of Zimbabwe Act, falls neatly within the definition of an “administrative authority”. The Governor is therefore subject to the provisions of section 68 of the Constitution and section 3 of the Administrative Justice Act.

Applying the above legal provisions to the contents of the Governor’s press statement, I am of the respectful view that his decisions and conduct offend our constitutional right to administrative justice.


Section 68 of the Constitution as read with section 3 of the Administrative Justice Act require the Governor to act in a lawful manner. It is established under our law that all administrative powers, including those of the Governor, must derive from statute and the nature and extent of those powers are to be found in the statutory provisions granting these powers.  Simply stated, this means that there has to be a legal basis, in Statute or delegated legislation for any decision that the Governor makes. The question to be asked is: what law authorizes the Governor to create “bond notes”, which bond notes then replace lawfully deposited US dollars.

It is worth highlighting that the term “bond note” is not defined anywhere in the Reserve Bank Act or the Banking Act [Chapter 24:20]. “Bond note” is not a term of conventional economics but an invention on the part of the Governor. It is clear that the law does not empower the Governor to create this, with respect, fictitious money.

Incidentally, the Reserve Bank Act does carefully delineate what powers the Reserve Bank has in instances where there is a shortage of currency of any denomination. In particular, section 42B of the Reserve Bank Act authorises the issuance of “Reserve Bank vouchers”, not “bond notes” where the Reserve bank is of the opinion that there is a shortage of currency of any denomination to pay civil servants or employees of the State. The shortage must be shown to require urgent action in the interests of public order or the economic interests of the State.

What is clear from this provision is that the Governor does not have a blanket power to create any document he thinks up to replace properly introduced currency. He also does not have the power to create such an alternative medium of exchange except where the shortage is specifically in respect of the payment of civil servants and where it is shown to be a public order emergency. The justification given by the Governor for the creation of bond notes is, therefore, inconsistent with section 42B of the Reserve Bank Act. The Governor’s justification for the curious move  relates to “foreign exchange stabilisation” and an unsatisfactory attempt to ease the cash crisis. Respectfully, the law does not permit him to create alternative “money” for these purposes. It is clear that the law does not empower the Governor to make any plan he deems necessary for the purposes of resolving a cash crisis.

It can therefore be argued with great force that the conduct of the Governor in creating bond notes does not have the force of law and is therefore unlawful, being contrary to the requirements of section 68 of the Constitution and section 3 of the Administrative Justice Act. His conduct in taking away depositors’ hard earned dollars also arguably breaches their right to property and their right to use and transfer their property as enshrined in section 71 of the Constitution.

Substantive and procedural fairness

Section 68 of the Constitution also requires the conduct of the Governor to be “substantively and procedurally fair”. I am of the respectful view that the policies announced by the Governor are not substantively and procedurally fair to the citizenry. To illustrate the point, it cannot be fair to take money that a person has banked in US dollars away and give that person “bond notes” which the Governor admits are not currency. If they are not currency, what are they? What use are they to the business community if they cannot be used to import goods? In terms of what law or economic principle has the Governor decided that one bond note will be equivalent to one US dollar? It is basic that a person cannot arrogate to himself the power to decide the US dollar value of a piece of paper and impose it as a medium of exchange and transaction. Such an approach offends basic economics and all known law and procedure.

With respect, it is no answer as is suggested in the press statement, to contend that the bond notes are guaranteed by an “Afreximbank facility”. What is this facility? What law authorizes this approach? What does the “guarantee” mean? What are the terms of the Reserve Bank’s agreement with Afreximbank? Is a person entitled, if the guarantee is a true suretyship as envisaged by the law, to approach this bank with the bond notes and redeem in their place United States dollars? If the answer is no, then there can be no substantive fairness in the decision. It appears that the Afreximbank explanation is a smokescreen to lull the country into a false sense of security when what we have for all intents and purposes is a re-introduction of the Zimbabwe dollar, in circumstances where the economy is unable to shoulder such a burden.

Additionally, section 3 of the Administrative Justice Act demands that an administrative authority must give any person whose rights, interests or legitimate expectations may be affected by his decision “adequate notice of the nature and purpose of the proposed action”. In this regard, it could be argued that in imposing cash limits on less than 24 hours notice, the Governor acted in breach of his obligation to act fairly. Procedural fairness, in particular the audi alteram partem (hear the other side) principle enjoins the Governor to consult all stakeholders widely and to allow affected persons an opportunity to be heard before making a decision concerning their property. It follows that the Governor has very likely acted in breach of his constitutional obligation to act fairly. It is no answer for the Governor to say that he had to ignore the obligation to give fair notice to avoid immediate cash withdrawals. The obligations imposed upon an administrative authority by the Constitution are peremptory anf cannot be derogated from.


The Governor’s decision has to pass the test of rationality. It can be argued that the decision of the Governor to introduce bond notes is not reasonable in view of the fact that the fundamentals that have led to the cash crisis, i.e. diminished productivity and our weak GDP have not at all been addressed. No sensible policy has been put in place to improve our exports and thus reduce the trade deficit. No thought has been given to the prospect of a black market developing in order to circumvent the stringent policies. If the concern is that certain foreigners e.g. the Nigerians and the Chinese are mopping up forex and externalising it, there has been no explanation as to why ordinary citizens have to be punished for this. The decision may also be said to be disproportionate in view of the corresponding harm that the new policies will create.

In solving one problem, it can be said that the Governor has created several more. All that the press statement addresses are the symptoms of the country’s economic problems. The fundamentals, e.g. the need to improve productivity, the need to introduce land tenure and the need to make Zimbabwe an attractive investment destination have all been ignored. the Governor complains of a trade deficit created by foreigners but ignores the fact that just three weeks ago the Minister of Indigenization was on the verge of closing all banks and did everything he could to scare away remaining investors. These are fundamental problems that cannot be resolved through the creation of monopoly money. The root causes underpinning the maladministration ought to be addressed. A painkiller will never effectively cure a bone fracture, which is what the conduct of the Governor respectfully amounts to.


One cannot escape the conclusion that the press statement points to an incremental approach geared towards bringing back the Zimbabwe Dollar, a prospect which many will agree is too ghastly to contemplate. It is hoped that further consultation on the issue, and an examination of whether there is a legal basis for the decision will lead to a rethink of the decision. The essence of administrative law is to check and balance executive power. The law ought to be invoked should the need arise in order to prevent an unlawful course of conduct. Failure to do so may result in an abuse of the Governor’s powers in breach of our Constitutional right to administrative conduct that is lawful, fair and reasonable.

Fadzayi Mahere

This article was originally posted on the author’s blog and was reproduced with the author’s prior permission.

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Friday, May 6, 2016

Some thoughts on bond notes

From: John <JMRobertson@umaxlife.co.zw>
Date: Thu, 05 May 2016 18:54:44 +0200
Conversation: Some thoughts on bond notes
Subject: Some thoughts on bond notes

An initial reaction to the proposal to introduce bond notes

The proposed introduction of bond notes, if it goes ahead, will introduce many additional sources of instability into an already severely stressed economy. As this measure will very temporarily address only a few of the symptoms of the underlying problem, that problem will remain in place.

The fact that Zimbabwe’s productive sectors have been disabled is the problem that needs attention. The country’s greatly diminished ability to grow food crops and produce the input volumes needed to sustain most of its consumer goods manufacturers has led directly to the massive trade imbalance. This, plus the highly regulated business environment, has drained money out of the country while making it an increasingly unattractive option for those who might have invested in new businesses, or re-invested in their existing enterprises.

Zimbabwe’s productive capacity is so depleted now that it is incapable of supporting a stable exchange rate for a local currency. If bond notes are forced upon the population, public resentment, distrust the all-too clear memories will cause their value to collapse, irrespective of any government declarations that their value is 1:1 against the US dollar.

As retailers are already having difficulty paying their foreign suppliers for the imported consumer goods, even though they have US dollar balances in their local bank accounts, the imposition of bond notes will quickly transform their bank deposits into balances that can buy local goods only. But even the few local suppliers who are still functioning need to import materials and spares, so their receipts of nothing but bond notes will soon put them out of business as well.

As empty shops will be seen to be on the way, a buying frenzy to build up household stocks will soon gather momentum and bring forward the date for severe shortages. To strip the shops of their dwindling stocks, the shoppers will queue as often as necessary to empty their bank accounts, but will do their best to avoid making new bank deposits.

The shortage of cash is one of the automatic consequences of having to import the goods that were once supplied by local farms, factories and mines. We remain with exporters whose total revenues are only half the amounts being spent on imports. The trade gap is being partly closed by the inflows of goods sent by Zimbabweans working abroad to support their families, and partly by the dissipation of short-term savings.

But in the past year or so, longer-term savings, held in the form of pension fund contributions, have been drawn down as well. This started when government targeted the pension funds as sources of loan funds, which the authorities extracted by requiring the funds to support issues of Treasury Bills. The money released from the pension funds, whether used by government to meet its own consumption requirements or to pay public sector wages, will have almost all found its way into import orders and left the country. As Treasury Bill issues have totalled more than a billion dollars, they alone would have been enough to precipitate a liquidity crisis.

One of the more ominous intentions behind the bond note proposition is that government might be planning to settle the maturing Treasury Bill debts by refunding the pension funds with bond notes. As the value of these bond notes cannot be supported by Zimbabwe’s business activity, their almost inevitable loss of value in the years to come could lead to a repeat of the hyperinflationary experience suffered by pension funds before 2008, when their liquid resources were rendered totally valueless. Many pensioners have remained in destitution ever since.

Government recently assumed the debts of the Reserve Bank as a measure designed to help it to start its recapitalisation process as well as to recover the financial stamina to carry its central banking responsibilities, particularly that of Lender of Last Resort. Government is keen to settle this debt and has offloaded some of it by offering Treasury Bills that have months or years to go before reaching their maturity dates. If the bond note proposition is accepted, they might offer an easy way for government to further reduce its debt burden.     

Evidence of government’s inclination to grant privileges to senior officials was easily seen during the currency meltdown that finally destroyed the Zimbabwe dollar. Before the final crunch, preferential exchange rates permitted extremely extravagant behaviour that is likely to be replicated if bond notes of questionable value can be forced upon the public in exchange for their more soundly valued US dollar earnings. Personal debts as well as spending discrepancies in various ministries might be more easily dealt with if unquestioned advantage can be taken of differential rates and timing delays.

Another menacing and more immediate item in the Press release is that, in an effort elevate the importance of the South African rand in Zimbabwe’s multi-currency basket, from today, May 5, 40% of all new US dollar receipts will be converted to rand. By forcing exporters who are earning stable US dollars to accept the far less stable rand for that or any proportion of their earnings, government is placing exporters at a potentially damaging disadvantage.  Apart from the currency depreciation risk, commissions are payable when converting from one currency to another, so such transactions should be left entirely to the discretion of the owner of the export proceeds.
In dealing only with the symptoms of the structural failures in the economy, the bond note proposal will further delay the adoption of policy changes that would have a chance of placing the economy on a more substantive recovery path. The needed policy changes should be designed to restore confidence among investors, mainly by removing the many regulations and controls that force every business to seek government permission before it can make development plans. Indigenisation laws are still in the Statute Books and those laws should be repealed.
Confidence also has to be restored in the banks, and that would best be done by restoring the collateral value of fixed assets that can be used as security for bank loans. Government crippled the economy when it declared all agricultural land to be the property of the State. That, in turn, led to all property prices falling as factories closed, office buildings became impossible to let and residential properties became victim to falling demand, collapsing services and falling faith in the future of the country. The adoption of the desperately needed investor-friendly policies that are dependent on respect for civil rights and property rights would see capital inflows that would rapidly overcome the liquidity shortage.
Every effort possible should be made to persuade the authorities not to adopt bond notes. Even though harsh measures might be proposed to force the issue, an early indication that the authorities will face refusals by shops, commuter bus drivers and other service providers to accept them in payment, and that private as well as public sector employees will refuse to accept them as wages, might be enough to force the proposal to be abandoned. We should all work towards that objective.