Zimbabwe fear return of hyperinflation with bond notes to cash runs out

Harare — In Zimbabwe, where worthless $100-trillion banknotes are reminders of the perils of hyperinflation, President Robert Mugabe is printing a new currency that jeopardises not just the economy but his own long grip on power.

Six months ago, the 92-year-old announced plans to deal with chronic cash shortages by supplementing the dwindling US dollars in circulation over the past seven years with bond notes, a quasi-currency expected at the end of November.

According to the Reserve Bank of Zimbabwe, the bond notes will be officially interchangeable 1:1 with the US dollar and should ease the cash crunch. The central bank also promised to keep a tight lid on issuance.

But many Zimbabweans are sceptical, remembering the 2008 meltdown when the inflation percentage rate was running in the millions because of rampant money printing.

Mugabe’s plan has already sparked a run on the banks as Zimbabweans empty their accounts of hard currency.

Internal intelligence briefings seen by Reuters raise the possibility that the bond notes, if they crash, could spell the end of Mugabe’s 36 years reign.

The Central Intelligence Organisation (CIO) said in a report dated September 29 that the army was as unhappy as the rest of the population with the new notes and said Africa’s oldest leader should “wake up and smell the coffee”.

“Top security officers have told Mugabe not to blame them if Rome starts to burn,” the report said.

Reuters could not find out who wrote the report or for whom. It is not clear if Mugabe has seen the report. Mugabe’s spokesman did not respond to requests for comment, nor was the CIO available.

But the report offers a rare glimpse into the thinking of Mugabe’s security forces — the backbone of his power — and their concern about the implosion of what used to be one of Africa’s strongest economies.

“Mugabe was openly told that the bond notes are going to cause his downfall,” the report said.

Waiting for the drop

The notes’ first test will come in the informal foreign exchange markets on the streets of Harare.

If they fall heavily in value, they are likely to unleash an inflationary spiral that could bleed the banking system of its last few dollars and wipe out Zimbabweans’ savings for the second time in less than a decade, economists say.

The same happened in 2008. Powerful individuals with access to dollars at the official 1:1 rate could buy bond notes at a discount on the unofficial market and then convert them back to dollars at face value.

“You start with one dollar, then you’ve got 10, then you’ve got 100, then you’ve got 1,000 — and it’s not even lunchtime,” said economist John Robertson.

In Harare’s chaotic Road Port bus station, the main terminus for those heading to and from South Africa, some bus operators fear the worst.

Required to pay nearly all their expenses — fuel, road tolls and police bribes in Zimbabwe and SA — in hard currency cash, they are particularly exposed.

“It’s like being on death row. You don’t know when the hangman is going to open your cell door,” said ticket seller Simba Muchenje, pulling a wad of worthless 2008 Zimbabwe dollars from his briefcase and tossing them on his counter. “It’s just taking us back to the bad old days.”

In interviews, none of eight money-changers trading rands and US dollars said they would accept bond notes at their $1 face value because of fears of immediate depreciation. The rand and the US dollar became Zimbabwe’s currencies when the local dollar was scrapped in 2009.

Patience, a 32-year-old money-changer, said: “The banks may say 1:1, but here we say 2:1. We can’t afford to pay the same as the banks. I’m running a business, not a bank.”

‘Export incentive’

Given Zimbabwe’s recent history of hyperinflation, the central bank is keen to allay fears that the printing presses are about to go into overdrive and that the bond notes are a roundabout route to a new Zimbabwe dollar.

“The introduction of bond notes does not mark the return of the Zimbabwe dollar through the back door,” it said on its website.

Instead, the bank has presented the notes as a 5% “export incentive”, a top-up added by the central bank to the accounts of those receiving foreign exchange either from overseas remittances or via farming, manufacturing and mining exports.

They will also be backed by a $200m “loan facility” from Afreximbank, a Cairo-based lender owned by the African Development Bank and dozens of African governments and central banks. Afreximbank declined to comment.

Given monthly exports of roughly $250m, the 5% top-up suggests a monthly liquidity injection of just $12.5m, or $1 for every Zimbabwean.

In public statements, the central bank has given assurances it will not exceed the $200m issuance ceiling.

But it has not clarified how bond note balances will be recorded in US dollar accounts, nor how ATMs will distinguish between greenbacks and bond notes when they issue cash.

“Upon withdrawal, banks have an option to pay in any one of the legal tenders,” the bank said. Its governor, John Mangudya missed a scheduled interview with Reuters and did not respond to e-mailed questions.

No dollars, no fun

Few Zimbabweans interviewed believed the bank will stick to issuance limits, especially while a large current account deficit continues to suck dollars out of the country.

After the bond notes’ announcement, #ThisFlag and #Tajamuka, social media campaigns targeting the new system, drew the biggest anti-Mugabe protests in a decade before being crushed by riot police and the intelligence agency.

Meanwhile, tens of thousands across the country queue through the night to empty their accounts the moment their pay or pensions arrive, aggravating the liquidity crunch. Banks responded with daily withdrawal limits: $100 one day, $50 another, none another.

Customers have no idea until the banks open their doors at 8 am.

“Sometimes you get to the end of the queue and there’s no money,” said industrial fitter Edmund Panganai, 40, at a CABS building society branch in Harare. Every month, it takes him at least seven nights of queuing to get his pay.

In Harare, where most US dollar bills are stained deep brown with grime, a crisp 2009-edition $100 note is now worth as much as $115.

Conversely, the plastic and mobile money introduced to ease physical cash shortages is depreciating, forcing vendors to charge a 10%-15% premium.

A prostitute, who had been relying on e-wallet payment systems such as Ecocash, run by mobile firm Econet Wireless, said she and other sex workers were turning away customers without hard cash.

“Ecocash? No thank you. Dollars, dollars, dollars,” said Patience, a 22-year-old working a Harare street corner. “No dollars, no fun.”

Army rationed

Combined with unemployment at 90% and a government budget crunch that has delayed payment of civil service wages, discontent also pervades the army.

The September 29 report said soldiers applauded the social media protests as they had led to an improvement in daily rations.

“Before the demonstrations, government had stopped supplying them with breakfast. At lunch they were being fed with sadza (maize meal) and cabbage without cooking oil. Mugabe instructed for the army officers to be given descent meals so they will rally behind him,” the report said.

Other intelligence reports from late September and early October suggested Mugabe had doubts about the bond notes. Reuters was unable to confirm this.

“The issue of the bond notes is giving Mugabe sleepless nights,” one said. “Mugabe is seriously thinking of delaying the introduction of the bond until January next year.”

Another report said army officers were frustrated with pay delays and withdrawal limits. “They are very angry as they are failing to access their money from the banks and do not want to be issued with bonds,” it said.

“These junior and middle-ranked officers reckon that Mugabe has failed so he needs to step down for new blood to replace him.”

Veterans at war

In July, veterans of the 1964-79 liberation war that swept Mugabe to power broke ranks, accusing him of “dictatorial tendencies” and blaming him for the “serious plight” of the economy and discord in the ruling Zanu-PF party. “We are dedicated to stop this rot,” they said in a statement.

As fears over the bond notes mounted and the battle to succeed Mugabe intensified, they continued to flex their muscle. “Once you go wrong with us, you automatically go wrong with the whole state apparatus,” veterans leader Chris Mutsvangwa told Reuters.

The veterans enjoy warm ties with the army and security services, and want Vice-President Emmerson Mnangagwa, a former security chief nicknamed “The Crocodile”, to take over from Mugabe, political analysts say. On the other side is a faction attached to Mugabe’s 51-year-old wife, Grace.

Mugabe responded to the growing pressure on November 19 with an address in which he admitted fallibility and gave a rare hint at retirement.

“If I am making mistakes, you should tell me. I will go,” he said. Then he went on to say: “Change should come in a proper way. If I have to retire, let me retire properly.”

Reuters