“The bond note is like putting lipstick on a frog to make it beautiful. You won’t succeed.”
So says Zimbabwean economist Dr Gift Mugano. Just over three weeks ago, the Reserve Bank of Zimbabwe (RBZ) released its new bond notes, a currency that is pegged one-to-one to the US dollar.
The US dollar has been the most dominant and preferred legal tender in Zimbabwe since the country adopted a multicurrency system in 2009, after its own currency experienced one of the worst cases of hyperinflation in world history. But supply of the US dollar is quickly dwindling, mainly because Zimbabwe’s local manufacturing activity has plummeted, and it now has to import more than it exports. As a result, more US dollars are leaving the country than coming in.
The bond note is the RBZ’s solution to this. It is also used to pay a 5% incentive to exporters before circulating in the market. However, Mugano argues there are better ways to solve Zimbabwe’s challenges.
“Our exports are 50% of the value of our imports. We import two times what we are exporting,” he explains.
“We have one problem: lack of productivity. We are not a producing country. All we are doing is dealing with the symptoms of this.”
Mugano believes that there are better strategies the government can pursue when it comes to dealing with the cause of Zimbabwe’s economic challenges.
Liberate commercial farming
In 2000, President Robert Mugabe sanctioned widespread land grabs from white farmers, handing the land to black Zimbabweans as compensation for the abuses of colonial rule. However, many of these farmers lacked the years of experience and knowledge required to manage large farmlands, and the country’s agricultural output quickly stalled.
These Zimbabwean farmers, many of whom are government allies, continue to rely on state handouts when it comes to farming inputs and equipment.
“Banks aren’t prepared to give money to these new farmers because they have no record and are not professional farmers,” explains Mugano.
He adds that it would be best if the government abandoned patronage and restored Zimbabwe’s commercial farming activity by allowing those with the experience and knowledge to drive the sector. This would increase agricultural outputs and reduce food imports.
Unburden the mining sector
“The mining sector is a very critical sector for Zimbabwe – 60% of exports come from the mining sector. So clearly this sector needs investment.”
According to Mugano, mining companies in Zimbabwe have to pay at least six different taxes –adding up to debilitating amounts that are unattractive to foreign investors. “At the end of the day, the mining sector is being milked and will end up dying.”
He argues that removing some of these taxes would help attract investors.
“And even if we don’t get new investors, the existing ones could expand their production. It’s only when you have too many taxes that the amount becomes too enormous for a company to spare money for expanding their operations.”
Remove VAT on machinery
Mugano believes there are better ways to unlock Zimbabwe’s manufacturing and export potential than by printing bond notes and using them to pay a 5% incentive to exporters. In fact, he argues that simply removing value-added tax (VAT) on imported manufacturing equipment and machinery could be more effective.
“If you are importing machinery that costs US$1m, you have to pay US$150,000 to the customs authorities. And a company doesn’t have that money,” he explains.
“It would be much better if the minister of finance waivered that and got these machines working to grow production, creating more exports and jobs.”
Deal with corruption
One of the major deterrents of foreign investment, adds Mugano, is corruption.
“Investors are running away from Zimbabwe because of corruption from ministers… So how do you develop a country when there is corruption?
“We need to deal with this in our country… Just look at South Korea. Their institutions are very strong and their president was kicked out because of corruption. Simple.”
Keep bond notes at low denominations
Bond notes are not an entirely new concept in Zimbabwe. The country has been using ‘bond coins’ of 1c, 5c, 10c, 25c, 50c (pegged to the US dollar) since 2014. Consumers could use these coins as change when purchasing goods in US dollars. Before this, the US$1 note was the smallest amount of the US currency in circulation. Bond coins allowed consumers to receive change for goods, like a loaf of bread, for example, that cost less than US$1. And they have worked.
These bond coins were too small to distort the economy’s money supply, but there are fears that the bond note could. The RBZ initially stated that the notes would be released in denominations of $2, $5, $10 and $20, but last month the bank released a statement saying it would issue bond notes in denominations of only up to $5 (this highest denomination is yet to be released).
Mugano believes that printing even a $5 bond note would be unwise. “If I was the governor [of the RBZ], I would not introduce the $5 bond note because the moment you go up [in value] you create more room for… black market activities.”
He notes that by keeping bond notes at small denominations, the RBZ could also reduce concerns that the government is trying to reintroduce the Zimbabwean dollar under the guise of a bond note.
“The bond note has resulted in capital flight… The people who are outside Zimbabwe, the investors, they will not bring in their money when there is fear of the Zim dollar coming back through the back door.”