A legal view of the legality of the bond notes that were announced by the RBZ.
By Tawanda Nyambirai
The Reserve Bank of Zimbabwe announced several measures that were intended to improve liquidity. The measures included the following:
1. A requirement for the conversion of 40% of export receipts to South African Rands, 10% to Euros, and 50% to United States Dollars.
2. The reduction in cash withdrawal limits and limits for export of cash to US$1,000 or Euros 1,000, or ZAR20,000.
3. The introduction of an economic stimulus in the form of a 5% incentive to exporters backed by a $200 million Afreximbank facility. The incentive would be given to exporters in the form of bond notes of prescribed denominations. The notes would be issued at par value with the United States Dollar. The aggregate value of the notes to be issued would not exceed the value of the facility that would be backing the note, namely $200 million. No details were provided whether or not a holder of the bond notes would be able to redeem them for cash at any stage, or whether there is any intention to drawdown on the $200 million facility at any stage to meet the maturity of the bond notes, or if at all the bond notes have a maturity date. If the notes are not redeemable at all, is the facility a mere confidence enhancer that will signify the endorsement of the bond note by a credible third party, the Afreximbank? All these questions are still open. I will assume that the reason these questions are open is that the stimulus package was announced as work in progress.
After the announcement by the Reserve Bank of Zimbabwe that bond notes would be issued, questions were raised on the legality of the bond notes and whether or not the move by the Reserve Bank of Zimbabwe made good economic sense. Some legal views have been expressed to the effect that the issue of the bond notes would contravene principles of natural justice and some sections of the Constitution of Zimbabwe. I respectfully disagree. I will explain my reasons in detail after making observations on the non legal issues surrounding the measures introduced by the Reserve Bank of Zimbabwe.
The issue whether or not the bond notes would make economic sense in the circumstances is one for debate by Economists. Not being an economist, I would submit, from a non-expert’s point of view, that issue of a 5% stimulus package to exporters is an appropriate response to the deflationary pressures that our economy is suffering from. However the other measures that were announced at the same time with the stimulus package have resulted in the message being lost. The package has been misunderstood as a return to the Zimbabwe Dollar. Consequently, the announcement has triggered a run on banks.
Where an economy is in deflation due to factors that include the shortage of currency, the use of stimulus packages that incentivize productivity is not uncommon. In fact, stimulus packages were used successfully by the Obama administration, alongside other measures to turn around the US Economy and prevent it from entering into deflation. This stimulus package is a great idea that was very poorly communicated. There was no need to announce it alongside all the other control measures that were introduced. This made it impossible for the market to sift the good news from the bad. Markets generally do not like controls, no matter how well intentioned the controls may be. Any announcement of controls is therefore bad news. The news was so bad it did not only overshadow the stimulus package, but it also created the impression that the stimulus package was a disguised attempt to reintroduce the Zimbabwe Dollar. It will take a lot to change the negative perception that was created about the stimulus. This whole saga threatens to soil the good name that the current Governor of the Reserve Bank and the current Minister of Finance had managed to build with the investing public. They will need to work extra hard to regain the lost trust. Trust lost only due to poor communication strategies!
In passing, I must wonder about the sense in converting US dollar receipts into a weaker currency, Rand! Such a move will mean that the receiver of the US Dollar Receipts will carry an exchange rate risk that they would not have to carry if their receipts remained in US dollars. I submit that this particular measure, as opposed to the proposed introduction of bond notes may be susceptible to a successful legal challenge on the basis of the principles of Natural Justice and the Constitutional provisions that prohibit the compulsory acquisition of property. It cannot be reasonably justifiable in a democratic Society for the State to compel its citizens to convert their money to a softer currency that makes them susceptible to exchange rate losses. I would have thought that what needed to be converted to Rand is our cost base, and not our revenue base. With a US dollar cost base, converting our US dollar export receipts to Rand will be suicidal. It will make us less competitive! If our cost base was in Rand and our export receipts were in Dollars, we would be quite competitive indeed.
The law on the issue of bond notes
Because the bond notes have not yet been issued, the issue whether or not the Reserve Bank has acted illegally does not arise as yet. Correctly put, the issue is whether or not there is a legal framework or sufficient legal provisions for the bond notes to be issued lawfully. I respectfully submit that there is adequate legal provision for the bond notes to be issued lawfully.
The Reserve Bank of Zimbabwe is established under the Reserve Bank of Zimbabwe Act, [Chapter 22:15]. The functions of the bank are listed under Section 6 of the Reserve Bank of Zimbabwe Act. The functions include acting, “as banker and financial advisor to, and fiscal agent of, the State..” Section 8 of the Reserve Bank of Zimbabwe Act reinforces this relationship between the Reserve Bank of Zimbabwe and the State.
Section 7 (1) (n) of the Reserve Bank of Zimbabwe Act grants the Reserve Bank of Zimbabwe the powers to borrow foreign currency outside Zimbabwe, but only on behalf of the State, and not on its own behalf. In the premises, it is safe to assume that the $200 million Afreximbank facility that will back the bond notes will be a facility that the Reserve Bank of Zimbabwe will conclude on behalf of the State, and not on its own behalf. It will not be a “quasi fiscal activity”! I assume.
The Reserve Bank of Zimbabwe Act does not itself deal with the issue of bonds or bond notes. Therefore, we have to look elsewhere for the law that deals with the issue of bonds, or bond notes. That law is called the Public Finance Management Act, [Chapter 22:19].
Section 54(3) of the Public Finance Management Act empowers the Minister of Finance to borrow money through the issue of bonds, stock, treasury bills, advances, or overdrafts. It is this section that empowers the State to issue bonds, or bond notes. A bond is defined in Section 2 of the Public Finance Management Act as, “a document issued in pursuance of Part VI acknowledging a debt and binding the State to pay a specified sum at a stated time or on special conditions, and includes a debenture or other form of certificate of indebtedness”. I submit that a bond note falls squarely within the meaning of this definition of a bond.
Thus, an exporter who will receive the bonds for free as an incentive will become a creditor to the State entitled to be paid, “a specified sum at a stated time or on special conditions”. I submit that a bond note cannot be open ended. It must either have a date of redemption, or it must state the special conditions upon which it will be redeemed. I posed here to look for a bond coin to check whether it complies with these peremptory requirements of the law on bonds issued by the State. I have a 50-cent bond coin minted in 2014. Although it specifies the sum due to the holder, it is open ended. It does not specify the date of payment, or the special conditions upon which it will be paid. I submit that the bond coin does not meet the requirements of the Public Finance Management Act, and is thus illegal.
Before accessing any loan, the Minister is required to obtain “in writing an opinion from the Attorney General … approving the legal aspects of the loan agreement”. In the case of a bond note, or coin, the agreement will be the coin or note itself. It will be interesting to see the basis on which the Attorney General would have justified the issue of an open-ended bond coin that does not specify the time of payment, or the special conditions on which it will be paid!
To be lawful, the bond notes will have to pass some further tests. Section 52(1) requires the Minister to obtain the authority of the President. I am sure it will not be too difficult for him to obtain this. However, Section 52(2) provides that in any financial year, the total local borrowings (which a bond note will be) cannot exceed 30% “of the general revenues of Zimbabwe in the previous financial year” without the authority of a Resolution of the General Assembly. General revenues of Zimbabwe include taxes, fees, and all receivables of the Consolidated Revenue Fund. The taxes collected by the Zimbabwe Revenue Authority for 2015 amounted to $3.5 billion. I would not know what other revenues were received into the Consolidated Revenue Fund. I have not had the time to look this up. 30% of $3.5 billion is $1.05 billion. At $200 million, when issued in full, the bond notes will be approximately 5.7% of the 2015 tax revenues. The Government would certainly have borrowed some more money through the issue of Treasury Bills, and other instruments. The aggregate of those borrowings, including the $200 million proposed bond notes, must not exceed 30% of the 2015 General Revenues without a Resolution of the General Assembly approving such a borrowing.
Therefore, to be lawful, the bond notes will require the following:
1. They have to be issued by the Minister under Part VI of the Public Finance Management Act.
2. They have to be authorized by the President.
3. They should not increase the aggregate borrowings by the State for the year by more than 30% of the 2015 general revenues of the State without a resolution of the General Assembly.
4. The Minister has to obtain a written opinion from the Attorney General approving the legal aspects of the bond notes.
5. The bond notes must have a redemption date, or special conditions for their redemption. They cannot be open ended like the bond coins were.
I humbly submit that the proposed bond notes can be issued lawfully if the above legal requirements are met. Whether the market will accept the bond notes at all, or at their face value from the hands of the receiving exporters will be an entirely different matter. Much will depend on their maturity date or the conditions upon which they will be redeemable, and whether the public will believe that the Afreximbank will allow a drawdown on the $200 million facility to meet the maturities of the bond notes. The confidence that the investing public will have in the ability of the state to access the Afreximbank facility to redeem the bond notes will determine whether or not the bond notes will be tradable, and at what discount, if any. It will not be lawful to compel the acceptability of the bond notes. No such intention to enforce acceptance of the bond notes through compulsion was evident in the Reserve Bank announcement. Therefore it will not be necessary for me to go into the detail of why I believe that it will be unlawful to compel the acceptance of the bond notes.
© Tawanda Nyambirai