Introduction of bond notes and demystifying the economic impact

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The central bank in any country must be responsible for maintaining the value i.e. purchasing power of currencies, in Zimbabwe’s case this include the US dollar, bond note, rand etc. all the available currencies being used in the multiple currency regime. The value maintenance is important for a critical issue which require the trust of the citizens in the money in this case bond notes and all the currencies in the multiple currency basket.  Whilst the Reserve Bank of Zimbabwe (RBZ) does not have the capacity to maintain values of currencies in the multiple currency basket the mandate to maintain the value of the bond note rest entirely on them. In this case the RBZ intends to maintain the exchange rate between US dollars and bond notes at 1:1. This is much like a fixed exchange rate regime, but different in the case that in this scenario there is no basis but a pure proposition and decree that the currencies are equivalent. It doesn’t follow that the value of 1 bond note will be equal to US$1, the proposition by RBZ does not have an intervention to influence market forces to ensure that the price of the currencies remain fixed. The exchange rate of Us dollars to bond notes can only be fixed by balancing demand and supply of the two currencies. In this case, it is not even possible to arrive at a balance of US dollars’ demand and supply versus the demand and supply of the bond note. The bond note proposition misses the required economic principles and is based on an unrealistic fixing of the exchange rate which is not practical in the real world. Maintaining a fixed exchange rate imply that when bond notes supply rises from the equilibrium point RBZ must go into the market and buy the bond notes, thereby injecting more US dollars into the market, if the supply of bond notes declines beyond the equilibrium they should increase it to the equilibrium by releasing bond notes and getting the excess US dollars.


There is no economic principle or fundamental used to arrive at the figure of US200m versus the total number of US dollar notes in the market and whether this will give the desired equilibrium where demand and supply of bond notes and US dollars is at balance. People of Zimbabwe don't trust that the bond notes will hold its value (i.e. in this case whether 1000 worth of bond notes will have the same value a month or year from now), because of this reason they will flee into other assets or currencies to maintain their purchasing power. The presence of multiple currencies will make it convenient for people to flee and reject bond in preference to other currencies. The disaster here is though we are using a multiple currency system those other currencies are equally not readily available in Zimbabwe, same as the US dollars. The consequence is a currency crises where demand for other currencies will rise and worsening the cash shortages. What will happen to those who hold an account in rand, pula or euros with Zimbabwean banks, when they want to withdraw their money the bank will offer to convert all these currencies to bond notes so that they can issue what is available, the bond note. Zimbabwe may not hold a referendum for bond notes but everyone will get to vote on how much they trust the new currency (bond notes) by their marginal propensity to hold it, or trade it away for something else. For retailers, it's a question of whether they will accept the currency in trade for goods, or something else or some other currency in Zimbabwe’s case. The bulk of traders are importing from South Africa and other countries the goods they are selling, therefore selling in bonds will involve taking more risk because their target aim is to get foreign currency to replenish their supplies.

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