Friday, May 6, 2016

Some thoughts on bond notes

From: John <>
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.


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