The game is bonds: Zim bonds. Picture: GETTY IMAGES/AFP/WILFRED KAJESE
The game is bonds: Zim bonds. Picture: GETTY IMAGES/AFP/WILFRED KAJESE


The introduction last year of bond notes, which the Reserve Bank of Zimbabwe claims have a par value to the US dollar, has helped the bank regain core monetary policy functions such as printing currency and influencing the direction of interest rates.

When the country dropped the Zimbabwean dollar in favour of multiple currencies to end hyperinflation in 2009, then governor Gideon Gono’s role shrank. At the time, that came as a relief because of Gono’s tendency to print money at a furious pace.

Economists say the newfound monetary power of John Mangudya — who replaced Gono in 2014 — is nothing to worry about should he exercise restraint; but others are sceptical.

So far, Mangudya appears to be managing the amount of bond notes in circulation well. The central bank claims bond notes are backed by a US$200m Afreximbank facility, which limits its ability to print beyond that.

However, inflation is another matter.

The country’s inflation rate broke into positive territory for the first time in two years in February this year. Gono’s major failure was his inability to keep inflation in check and to defend the value of the Zimbabwe dollar against major currencies a decade ago.

Mangudya has avoided the pitfalls of running the printing press excessively. But he may be tempted.

A severe cash shortage is piling pressure on the central bank to ease the crunch. It’s a temptation Mangudya has resisted to date, but that hasn’t been enough to stop inflation from increasing, which it has done since February.

Economist Prosper Chitambara says: "We have seen inflationary pressures rising and this is largely because of the introduction of bond notes. If the bank doesn’t increase the amount of bond notes in circulation, inflation should be held in check."

Inflation rose to 0.75% in May, up from 0.5% in April and 0.2% in March, a worrying development for investors. The International Monetary Fund expects inflation at the end of the year to be at 5%, a figure Chitambara casts doubt on. "I think inflation will exceed 1% this year," Chitambara says.

That doesn’t sound like much, but it is enough to send shivers down the spines of Zimbabweans, for whom hyperinflation — which wiped out people’s savings — is still a fresh memory, though the country has been more familiar with deflation in recent years.

Mangudya may be playing it safe. But with 2018 elections in the offing, there are fears that President Robert Mugabe, who is known for pursuing questionable economic policies close to election time and for making populist policy announcements, may lean on him. Mangudya could be forced to throw caution to the wind and run the printing press beyond the $200m backed by the Afreximbank facility.

Chitambara concedes there is pressure on Mangudya to print money. "But also I think the economy is going to grow. That might mitigate pressure on printing bond notes," he says. "If there is an increase in money supply, it must be accompanied by productive growth. What definitely is not sustainable is growing money supply without increased production."

Instead of bond notes, banks are overburdened with bond coins that cannot be used to buy foreign currency, which has traditionally become a store of value for Zimbabweans in tumultuous economic times.

Economists say Mangudya is being smart in that regard.

Though he might be sticking to the rules in terms of how much money he introduces into circulation, he is also printing money indirectly.

He has issued treasury bills and sold them to banks, which are happy to take up the paper because of a credit crisis in the market. The central bank, through its Zimbabwe Asset Management Corp — a special-purpose vehicle for debt takeover — has taken over more than $800m in nonperforming loans from banks, leaving them in a fix.

"There is a consensus in the market and it is not a secret that the [bank] balances are not backed by actual cash any more," MMC Capital founder Itai Chirume says.

All electronic balances are discounted against cash in the market. A premium rate ranging from 12% to 20% is paid by people seeking cash.

Against such a background there is a lot of fictitious money in circulation.

The central bank has just honoured payments for maturities on treasury bills. With more maturities and limited investment choices in the market, the equity market has benefited.

But how long will Mangudya’s game succeed?

Many fear inflation could rise faster next year as more electronic money is created to finance government expenditure.

This year alone, $600m worth of treasury bills have been issued to finance government operations.

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