The Reserve Bank of Zimbabwe released Bond Notes into the banking system this week to mixed reactions. The notes follow the release of bond coins in December 2014 and they will also be pegged to the Dollar. The notes will be part of an export bonus scheme which will see exporters earn 5% of exports receipts in bond notes as an incentive.
The bond coins were initially released to increase liquidity in the system (especially in transactions under 1 US Dollar) as the economy was mainly using Dollars notes. US Dollar coins were scarce as they are expensive and difficult to import. The bond coins were minted in South Africa however it has been kept a secret as to where the notes will be printed. The Bond notes are being introduced to alleviate capital flight, hoarding of US Dollars and looting as well as to boost exports in the country.
Officially the notes are not a currency but have a $200 million guarantee backed by African Export Import Bank (Afreximbank). This caps the amount of Bond Notes that can be issued to that amount. The only other way that the bond notes could increase is if exports increase. There will be daily and weekly withdrawal limits of the notes to the public of $50 and $150 respectively (however officially it was supposed to be $1,000 a day). The notes are set to remain in place as long as the guarantee facility remains in place. The bank is adamant that this is not a return of the Zimbabwe Dollar as economic fundamentals for the return of the currency are not in place. These would include foreign exchange reserve of 12 months of import cover, a balanced government budget, stable inflation and interest rates, as well as confidence in the economy.
The Bank mentioned that the multi-currency system will remain in place. Zimbabwe uses the US Dollar, Pound, Rand, Euro, Yen, Australian Dollar, Yuan, Pula and Rupee as legal tender. News sources say vendors on the street are already using the currency however there are some formal retailers which seem to be rejecting them. There is general skepticism around the release of the notes.
Zimbabwe has been using the US Dollar (amongst other currencies) as its main currency and 60% of its imports are from South Africa. Because of this the country has been experiencing deflation for the past 2 years. Inflation was recorded at -0.95% in October 2016, up from -1.33% in September. The use of Dollars has also made the country’s exports less competitive which has hurt local production. The country’s trade deficit was recorded at USD2.5 billion.