Bond notes

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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I remain convinced that, to help arrest Zimbabwe’s further decline, the Reserve Bank’s bond note proposal should be withdrawn without delay.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:

https://fadzayimahere.wordpress.com/2016/05/05/a-legal-opinion-on-mangudyas-decision-to-introduce-bond-notes/
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.



Lawfulness

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.

Reasonableness

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.

Conclusion

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.
https://fadzayimahere.wordpress.com/2016/05/05/a-legal-opinion-on-mangudyas-decision-to-introduce-bond-notes/

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