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Uncertainty around Zimbabwe's bond notes

Zimbabwe, which has been using a basket of multiple currencies since 2009 after abandoning its own currency, is battling for liquidity and fresh capital investment. 

Industry has stagnated despite some up-shoots of recovery, and the economy is still bleeding jobs, with companies scaling down or closing. 

It was against this backdrop that Harare introduced bond notes – essentially local currency reportedly backed by a $200m facility from Afreximbank – to incentivise exporters and to deal with cash shortages in the economy. Inability to access cash has resulted in Zimbabwean companies facing delays in repaying debt facilities and importing key raw materials as well as equipment.

“Nobody is sure yet how the bond notes are going to work. We will get 5% (incentive on export sales receipts) but we have also heard that some of it may go into nostro accounts,” said Batirai Manhando, managing director of Zimbabwe listed nickel operation, Bindura Nickel Corporation. 

The central bank says 50% of export proceeds should be translated into Real Time Gross Settlement System that allows for transactions inside Zimbabwe. The balance is then paid as hard foreign currency into international accounts for companies, with the accounts able to be used for international purchases and remittances to shareholders. 

Telecommunications group, Econet Wireless and Delta Corporation, the Zimbabwe unit of AB InBev, are among Zimbabwean companies that have been affected by the cash crunch. 

Growing calls for the unofficial adoption of the rand have been rebuffed, although some banks such as Barclays Zimbabwe are offering cash withdrawal in rand as an option. Despite the introduction of the bond notes, long queues at banks in Zimbabwe remained, with depositors mostly getting cash from ATMs in both bond notes and US dollars (with the $100 limit per day still in place). 

Zimbabwe could also be blacked out if it does not immediately settle about $18m and $9m in oustanding arrears owed to Eskom and Hydro Cahora Bassa of Mozambique respectively for power exports to the southern African country. 

“Indications are that we will get a net of 2.5% of whatever proceeds we get because the central bank says 50% goes into RTGS. This means that we get 5% of the 50% (that is retained as foreign currency) as incentive in the local bond notes,” explained a finance manager with a Zimbabwean export company. 

The bigger supermarkets in Zimbabwe such as OK Zimbabwe and Pick n Pay, which has a partnership with Meikles in TM Supermarkets, initially declined to accept the bond notes while fuel retailers were also not openly accepting the new currency. But most of the supermarkets and fuel retailers such as Puma and Total were now accepting the bond notes. 

Puma even notified its clients that it accepted “payment methods” such as cash, Visa and MasterCard, fuel coupons and bond notes at its fuelling stations countrywide. However, there has been talk that the retailers in Zimbabwe have been forced to accept the bond notes as payment methods after the central bank held meetings with chief executives and the retailers association in November. 

Business executives in Zimbabwe told finweek that the bond notes would work smoothly in the economy if companies would then be able to convert them into other regional and international currencies for procurement and remittance purposes without hurdles. 

“The big question will be on accessing foreign currency for procurement and remittance to capital funders and shareholders outside Zimbabwe. It still remains half imports and half local sourcing in terms of raw materials, equipment and supplies in supermarkets and for other businesses,” a business leader said. 

Analysts said the introduction of bond notes revives memories of the hyperinflation environment witnessed during the 2000s when the central bank minted Zimbabwean dollars “feverishly to fund” fiscal deficits. 

“The central bank is trying to calm hyperinflation fears by assuring the public that the printing of bond notes will not exceed the $200m facility and that the multicurrency system will be maintained. 

“Given the deteriorating fiscal position, there is a possibility that the apex bank will end up monetising the fiscal deficit to a certain extent, hence printing more bond notes than that determined by the loan facility,” said Cephas Forichi, an analyst at NKC African Economics. 

Zimbabwe has been in deflation in the past two years but the rate has started to retreat following a hike in prices for most foodstuffs, according to Zimstats, the country’s statistics agency. The introduction of the bond notes is now expected to “feed into inflation expectations, with inflation expected to return to positive territory in 2017,” according to NKC African Economics. 

By the end of November, the Confederation of Zimbabwe Industries said capacity utilisation had improved by 13% to about 47% for the year to date period, although over 24% of surveyed industry companies had been forced to retrench workers, while 74% reduced working hours and 15% instituted a cut on labour costs to survive Zimbabwe’s turbulent economy. 

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