I’ll start with a story. There was once a chicken farmer called Jabulani, and a duck farmer called Tatenda. Both Jabulani and Tatenda had only been farming for a short period, and each had 20 birds. After a lengthy conversation at the local market, both Jabulani and Tatenda decided to diversify and also start farming the fowl that their counterpart was farming. They soon made an exchange where Tatenda gave 10 ducks to Jabulani, and Jabulani gave 10 chickens to Tatenda. They made the exchange at a rate of 1:1, exchanging one chicken for one duck, and vice versa. The rate was based on the shared belief that chickens and ducks have equal value. Once they made the exchange, both Jabulani and Tatenda each had 10 ducks and 10 chickens. A few days later, a rare virus that only affected ducks spread in their district, killing all the ducks in the area including those belonging to Jabulani and Tatenda. While Tatenda was fortunate that he diversified before the outbreak, Jabulani was not so lucky. Having initially owned 20 healthy chickens, Jabulani had lost 10 ducks, wiping out half the value he started with. While it would be reasonable and true to conclude that the virus killed 10 of Jabulani’s ducks, it would be untrue to say the virus killed 10 of Jabulani’s chickens. That is because while the ducks and chickens were equivalent, they were not and will never be identical. If they were, then the virus would have killed all 40 birds.

This story illustrates the heart of the problem surrounding Zimbabwean local currency bonds and their stated equality to U.S. dollars. There are two types of equality which we have to distinguish. These are equality of value where two things are equivalent to one another, and equality of identity where two things are identical to one another. While debatable, one can reasonably state that currency bonds are equivalent to U.S. dollars, but stating that the two are identical is not true.

Virtual vs Tangible

You may say that no one has claimed that currency bonds and U.S. dollars are identical. Some may say the equality being referred to has always been equality of value. While equality of value may have been the intention, it is a different matter in the practical implementation. To show this difference, we need to separate virtual currency and tangible currency. The causes of the liquidity crisis in Zimbabwe are not simple and relate to the balance of trade (imports vs exports). However, we also have a situation where there is more virtual currency (the numbers in your bank account) than tangible currency (hard cash in hand). The solution proposed by the Reserve Bank of Zimbabwe is to add more virtual and tangible currency into the economy through issuing currency bonds which are being referred to as bond notes, in their tangible form. They will do this using an export incentive scheme which will reward exporters with an added 5% of the value of their exports as a bonus. In total, they will issue currency bonds with a value equal to the sum of all 5% bonuses into the economy. While tangible currency bonds (bond notes) are clearly not identical to tangible U.S. dollars, applying the 5% bonus directly into an exporters U.S dollar bank account (containing virtual currency) means that virtual currency bonds are being treated as though they were identical to virtual U.S. dollars. To be clear, the 5% export incentive bonus is not actual U.S. dollars. It is currency bonds backed by an Afrexim Bank facility, to give them a proposed value equivalent to U.S. dollars. They are not identical to U.S. dollars in either their virtual or their tangible forms. However, they are being treated as though they were, at least in their virtual form. The result is that this implementation method is unreasonable and inconsistent with reality. Looking back at our story, while ducks and chickens may be equivalent, the fact that they are not identical is beyond all logical dispute.

Account Segregation

To address this confusion of identity, it is necessary to segregate virtual currency bonds from virtual U.S. dollars. We can do this by creating currency bond bank accounts which hold virtual currency bonds. A depositor can withdraw these virtual currency bonds from the bank as tangible currency bonds (bond notes) or exchange them for virtual U.S. dollars transferred into their regular U.S. dollar bank account at a rate of 1:1. The depositor can then withdraw tangible U.S. dollars from their U.S. dollar bank account, according to limitations set by their bank. So account segregation does two things. It first makes it clear and transparent that currency bonds, while equivalent to U.S. dollars, are not in any way implied to be identical to them. It also limits the consequences of any unforeseen events that may affect the value of currency bonds. If, despite all efforts, the market regards the value of bond currency to be lower than the value of U.S. dollars, this segregation will limit the resulting inflation to only virtual currency bond accounts. This would protect the value of U.S. dollar deposits and avoid a widespread banking crisis where the market rejecting currency bonds also affects the value of the all money in the bank, including U.S. dollars. To be optimistic about the success of the currency bonds is understandable, but it is wise to be prudent and prepare for the worst.

Explicit Conversion

The proposed method of implementing account segregation is to have exporters create currency bond bank accounts, and for the Reserve Bank to issue virtual currency bonds into these accounts. Exporters are then free to withdraw tangible currency bonds (bond notes) from these accounts. They can then exchange the bond notes for goods and services in the market at the rate of 1:1 with the U.S. dollar. If an exporter prefers to keep their money as U.S. dollars, they would be able to convert their virtual currency bonds into virtual U.S. dollars at a similar rate of 1:1. This means that banks would buy virtual currency bonds from the exporter and keep these currency bonds in an internal segregated account. If any other depositor wants to get currency bonds for the added liquidity they give, they can also create a currency bond bank account and buy virtual currency bonds from the bank in exchange for virtual U.S. dollars at the stated rate of 1:1. Once these virtual currency bonds are in their currency bond bank account, the depositor will also be able to withdraw bond notes for use in trade. This method involves the explicit conversion of currency bonds into U.S. dollars and vice versa. The advantage is that it conducts all transactions in a transparent manner and it is clear to all parties that currency bonds are not identical to U.S. dollars.

Embracing Innovation

I love innovation and I applaud all efforts to find innovative solutions to the challenges the economy is facing. The currency bond scheme is an innovative attempt to deal with the liquidity crisis, but we must move forward with caution and a clear understanding. All innovations are experiments. That is their nature, and they can end in either success or failure. So with currency bonds, it is important to accept the risk of failure and limit its potential cost to what the economy can bear. By segregating currency bond bank accounts from U.S. dollar bank accounts, we create a means of containing any potential damage caused by unforeseen shocks, and avoid an economic catastrophe where, metaphorically speaking, a virus kills all 40 of our birds. I recognize that this approach may not be ideal for people on both sides of the conversation, but it is my attempt at finding a reasonable compromise that retains the ability of addressing the liquidity crisis, while also guarding against the worst potential outcome.