The bond coins and notes were introduced in 2014 and 2016 respectively. Their introduction was met with much controversy. In spite of the currency being backed by a US$200 million facility from the Africa Export Import bank, there were many questions which largely went unanswered. Public protests were seen. The motives of the government were also questionable. The Reserve Bank of Zimbabwe (RBZ) claimed that bond notes were an export incentive to be given as bonus to exporters for accepting their proceeds in bond notes.
1:1 contention and parallel market
While the government insists that the Bond is at par with the dollar the market clearly holds a different view. As Zimbabwe started to experience a cash crisis, which by the way is something else that bond notes were meant to be a solution to, a parallel market started to emerge. Bond notes started to dominate the transaction system while US dollars became more scarce on the market. US dollars started to be sold at a premium.
Fortunately for the purposes of this discussion we have a precedent in recent history to help us understand the outcomes if government were to float the bond. Also I must point out that while on the ground money in the bank (RTGS), mobile money (Ecocash, 1 wallet) and bond notes & coins are considered separate items we will consider them all as bond money. This of course excludes money held in FCA nostro accounts.
October 2018 timeline
In October 2018 we got a taste of the fallout that would ensue. I’ve chosen to present the events of October as a timeline to illustrate how fast things were happening. The rates below were mainly sourced from Zimbollar twitter feed.
September 30: Rate 120% (US$1= 2.20)
October 1: Banks instructed to separate Foreign currency and local currency accounts
October 1: 120% (US$1= 2.20)
October 2: 120% (US$1= 2.20)
October 3: 130% (US$1 = 2.30)
October 4: 138% (US$1= 2.38)
October 5: 154% (US$1 = 2.54)
October 5: 162% (US$1 = 2.62)
October 8: Finance Minister Mthuli Ncube says Zimbabwe is self-dollarising because bond notes are not equal to USD
October 8: 180% (US$1 = 2.80)
October 8: 215% (US$1 = 3.15)
October 9: 260% (US$1 =3.60)
October 10: 305% (US$1 4.05)
October 10: Minister announces deal with Afreximbank
October 11:400% (US$1 = 5.00)
October 11: 350% (US$1 = 4.50)
October 12: Rate drops to 150% (US$1 = 2.50)
October 15: 130% (US$1= 2.30)
The reason why I believe this period holds all the answers to the flotation question is because the events of it were started, exacerbated and ended by announcements. The first announcement indirectly addressed the lack of parity. The market interpreted it directly and the value of the bond fell slowly. The second announcement was an outright admission of a lack of parity and it sent the bond value into a tailspin. The third sought to reassure the market through a facility that would guarantee convertibility. This cooled the market, very fast indeed.
The return of hyperinflation
The first effect we saw in October were rapid price increases. It became somewhat comical as shops closed, sometimes for just minutes, to re-open with prices hiked. Zimbabweans are no strangers to hyperinflation and know just how bad it can get.
We’ve discussed the impact of the fall of our currency on insurance products before. Similarly, paper assets such as shares and debt will go into a valuation crisis were they are denominated in bond. Now this is a grey area because these valuations, at least post 2009, were in US dollars. So a little policy clarity would help as to how the market would deal with such valuations. Absent that we may see another complete loss of value for people and businesses.
This practice is more reminiscent of 2008 era where prices are maintained in US dollars while the bond price is calculated daily based on the rate. This is applied where the rates change rapidly. October’s events showed that this is likely. While the practice is already present in the market, a fast moving rate makes it more noticeable.
Foreign currency preference
Retailers have also chosen to sell some things for dollars. Commodities such as fuel have already started to be sold for US dollars. The scarcity of US dollars though may make this difficult to sustain in the long run and for all products.
Bond may be relegated to transaction currency
While the bond may be undesirable it does have the advantage of being widely available (in RTGS and mobile money). This may give rise to a situation where the bond becomes a transaction currency with the US dollar still the currency of account.
While these events happened strictly on the alternative market we must point out that a fully open market would likely bring some different result dependent on policy factors. An open currency market would allow greater access to currency within the market. Also a floating rate valuation of the bond would mean the currency is not as risky to hold. Money supply growth would also impact how things progress. A limited or constant supply of bond money would lead to the market finding a balance. However, if the supply of bonds continues to grow, their value would fall. All this to say in the absence of other policy reforms, the floating of the bond against the dollar would lead to a depreciation in the bond.