The Reserve Bank of Zimbabwe (RBZ) is reportedly planning to increase the current $200m bond notes in the Zimbabwean economy to $500m given the shortage of cash in circulation. 

In November 2016, monetary authorities introduced bond notes (originally as an export incentive) to ease US dollar shortages. 

The US dollar surrogate currency is backed by a $200m loan facility from the African Export-Import Bank (Afreximbank). 

The release of the bond notes allowed Zimbabwe to escape its deflationary environment, with consumer price index (CPI) inflation moving into positive territory since February 2017.

To allay market fears that the introduction of an additional $300m worth of bond notes signals a possible return of the Zimbabwe dollar, Governor John Mangudya highlighted that the “multi-currency system is here to stay up until the fundamentals of our own currency have been achieved.” 

Furthermore, to help safeguard the value of the bond notes, the governor stated that Harare was currently negotiating with Afreximbank to secure an additional loan to serve as backing for the $300m note issuance.

Chantelle Matthee, Analyst at NKC African Economics, said that multilateral institutions, such as the International Monetary Fund (IMF) and World Bank, are concerned about the bond notes losing their value against the US dollar, subsequently fuelling inflation. 

“Both institutions have rather similar views, forecasting inflation to average close to 3% in 2017. However, we have a more conservative view, projecting inflation to average roughly 1% this year. Headline inflation eased to 0.31% y-o-y in June after showing an upward trajectory for six consecutive months; in our view, this provides at least some scope to increase the bond notes currently in circulation,” she said. 

“That said, it is important that any additional bond notes be backed by equivalent amounts of US dollars to help defend the value peg. Also, we believe it would be prudent for the RBZ to follow a strategy characterised by a gradual introduction of additional bond notes. This would allow for better control over the money supply while also giving the apex bank the opportunity to monitor the market’s reaction and the value of the bond notes,” she added.