Central bank regulators in most advanced and emerging economies are trying by all means to stimulate economic activity and maintaining price stability through using the monetary tools at their disposal.
During the last week of January, central banks in Turkey, India and South Africa surprised the markets by hiking repo rates and interest rates. All these moves were implemented to contain inflation within their respective countries.
The US Federal Reserve, on the other hand, announced its resolve to further reducing its monthly bond purchases by another US$10 billion, to US$65 billion, beginning in February. The decision by the Federal Open Committee Meeting came in light of the gradual economic recovery being experienced in the world’s largest economy.
Zimbabwean regulators were also not left behind. During the same week they presented their maiden monetary policy statement since the inception of the new government.
In Zimbabwe’s case, the Reserve Bank of Zimbabwe (RBZ) does not have adequate monetary policy tools at its disposal mainly due to the use of a non-sovereign currency.
Thus most of the measures announced were persuasive in nature. Nonetheless, the RBZ managed to surprise the market by announcing a number of measures primarily meant to enhance corporate governance and risk management.
For starters, with the increasing risk being posed by insider loans and non-performing loans, the central bank, with immediate effect, restricted banking institutions’ ability to grant loans to insiders and related interests.
Further to this, existing insider loans may not be renewed or rolled over. Banking institutions were urged to take measures to ensure repayments are made in terms of these facilities. This is a step in the right direction as it enhances corporate governance.
Insider loans at the end of December 2013 stood at US$175,3 million with 67% of the amount regarded as non-performing. While the move is commendable, an exception for granting loans as part of employees’ conditions of service, may act as a loophole.
This exception may possibly become a means through which bankers may access insider loans. However, this may be mitigated by the fact that employment loans have reasonable limits and are repaid through deductions from salary.
Linked to the above measure, the proposed amendment to the Banking Act to incorporate criminal and civil liability was also another progressive move especially for Zimbabwean indigenous bankers.
The new measure seeks to introduce criminal and civil liability of any shareholder, director or senior management of a banking institution who is found to have acted negligently or fraudulently resulting in loss of money by depositors or failure of a banking institution. Public confidence maybe restored by this move which may lead to depositors’ investing funds through formal banking channels.
The major reason for low public confidence and a poor national savings culture is partly the fact that most shareholders and directors were not brought to book when institutions failed due to their negligence. Failed banks were put under curatorship and subsequent liquidation with severe losses to depositors.
Thus, with such a measure, negligent and fraudulent behaviour may at least be reduced depending on when the amendments are made and justice allowed to take its natural course.
Furthermore, banking institutions were literally given an additional lifeline through the extension of the capital requirements deadline to 2020 from the initial deadline of December 31 2014. This was done because most local institutions have been struggling to meet even the initial hurdle of US$25 million.
By adding six more years, banking institutions were given a new lease of life. This may be more beneficial to small indigenous players.
However, if the environment remains challenging due to illiquidity and further economic contraction, most indigenous banks may fail to meet the 2020 deadline. The decision by RBZ to encourage struggling institutions to merge or downgrade may also be a sign that the sector is overbanked adversely affecting small players.
While acknowledging the RBZ’s initiative in taking the above-mentioned measures, there is still no clarity on the very critical issues of when the lender-of-last-resort function will be restored and the central bank will be adequately capitalised. The major concern relates to where the funding, estimated to be around US$150-200 million, will come from in a liquidity strapped economy.
Thus until there is a clear indication on how and when the government intends to recapitalise the RBZ, resuscitate lender-of-last-resort function and facilitate the interbank market, sector woes can be expected to persist.
Another key area about which market participants hold a pessimistic view is the issuance of Treasury bills (TBs) after the successful capitalisation of the central bank.
The central bank announced that these bills will be issued for the purpose of providing collateral and also as a way of raising funding for government operations.
While TBs in other economies are widely and commonly used instruments, this is not so in Zimbabwe due to the loss of confidence by players in the government. Hence, the uptake of the instrument especially for collateral purposes may possibly be very limited.
More so, the establishment of a yield curve with benchmark interest rates of 6 to 8% for maturities between 30 days and one year may not encourage lenders. This is because it has become risky to deal with government.
Overall, the RBZ has managed to do as much as it can reasonably be expected to do within its powers. However, the banking sector, just like other sectors can recover only when broader economy recovers.
Thus there is need for the main obstacle to be addressed first which is the vicious liquidity crisis which has seen aggregate demand weakening. The major solution for the revival of the economy largely remains that of attracting foreign investment inflows as all sectors require funding to return to profitable levels.