It seems as though Zimbabwe is now on the bond-note cusp:
- The President used his executive powers to promulgate a new statutory instrument, granting Zimbabwe’s Reserve Bank the right to issue bond notes;
- The Minister of Finance has released a press statement to outline their introduction.
- There are educational campaign ads.
- The Zimbabwean Stock Market is having a magnificent month, as people flock to stores of value.
- There are long queues for US dollar cash withdrawals in anticipation of their arrival.
- The banks have started issuing revised Terms and Conditions to their clients.
- And the Vice President has suggested that there might be specific transactions that have to be conducted in bond notes (thereby imposing an exchange requirement for foreigners).
From the new statutory instrument:
From the Press Release:
An example of those new Ts & Cs:
I can’t help but wonder if all those news stories about the German firm refusing to print the bond notes weren’t just a kind of subterfuge to dull the growing panic.
Some general observations:
- Do we remember the furore around Bond Coins? It seems that, given enough time, the economy can usually adapt to these changes. Even this one (although there is a lot more public opposition this time).
- There are uses for bond notes that most Zimbabweans can agree on. Using them to pay fines at all the police roadblocks, for example. And Radio Licences. And utilities. Those kinds of bills, we’d happily pay in bond notes. In fact, for most people, if you could settle your ordinary day-to-day expenses in bond notes, you wouldn’t really mind (unless, of course, there was a ‘premium’ charged for bond note payments – see point 4 below).
- The immediate problem (for most people) are their savings. If you have them, you don’t want them in bond notes, because <see point 4 below>.
- The much more important problem (for everyone) is that the bond notes might inflate away value.
Right now, I think that last point is only partly true. For a mass loss of value, you first need to have widespread use of the bond notes – and let’s see if we even reach that point…
But what you will almost certainly have is a sudden depreciation of the bond notes against the dollar. Nominally of course, a $2 bond note must be exchangeable for two $1 US dollar notes – that is what the new statutory instrument requires.
In practice though, Zimbabweans are very familiar with the mechanics of an official exchange rate. If the official exchange rate is not the same as the market exchange rate, and the Reserve Bank does not actively engage in the market to get the two to match, then the official exchange rate becomes theoretical (because you can almost never transact in it).
Instead, the parallel market takes over – and only a few favoured industries (and individuals) get priority in the line for official-exchange-rate transactions.
So let’s assume that this happens, and there is an immediate 20% decrease in value of the bond note against the US dollar note. At this point, there are two options:
- Zimbabweans en masse refuse to use the bond notes, and the RBZ is back to square one; or
- There is a gradual acceptance of the use of bond notes, with some kind of a premium attached.
Assuming that there is gradual acceptance of the bond note, what happens?
- Almost immediately, US dollar cash will start disappearing from the market.
- The private sector and the informal sector will adjust their prices to reflect the newly depreciated bond note.
- The importers will still be tussling for payments at the official one-to-one exchange rate – but they’re already doing that, so there won’t be much of a change on that front.
- The exporters and local industries will become a bit more competitive, because they’ll be getting an effective discount on their local costs.
- At this point, private sector wages will start to adjust in order to reflect the new cost of living increases.
It’ll be painful, but there will be some kind of new equilibrium re-emerging.
I think what is really important here is what happens to the civil servant wage bill. And given that it consumes 98%+ of the government’s spending (and it’s what has driven this mass borrowing of government on the domestic market), I’d argue that it’s where the core of the Zimbabwean economic problem lies.
Assuming that there is no wage adjustment for the civil servants (or that the upward adjustment is less than the depreciation of the bond note), then the government gets an immediate discount on its biggest bill. At the same time, their revenue collections will be on the up due to those adjusted prices and private sector wages.
Which doesn’t sound like the worst thing.
How it could go wrong:
- The RBZ gets carried away with the printing of bond notes (which will be a massive fail all-round for this experiment);
- The civil servants (army and police included) rise up against their newly-discounted wages.
And I guess we’re all about to find out?