In his recent Monetary Policy Statement the RBZ governor announced a raft of confidence and production enhancement measures that include: resolution of non-performing loans through Zimbabwe Asset Management Corporation (ZAMCO), consumer protection, capitalisation of the RBZ, demonetisation of the ZWD as well as a credit reference bureau.
The monetary policy is coming at a time when the economy is in a recession. The statement, though well received by the market, is largely symbolic owing to monetary policy sterility because of the multiple currency regime.
With the adoption of the multiple currency system the role of the Monetary Policy has been seriously emasculated. The role of Monetary Policy is to manage money both in terms of its quantity and also in terms of its cost. The cost of money is the interest rate.
The interest rate is determined by the quantity of money supply in circulation in the economy. However, Monetary Policy in dollarised economies such as Zimbabwe is very challenging because of inability to influence the money supply.
There is a weaker monetary transmission in dollarised economies. This comes from the fact that the foreign currency component of broad money cannot be directly influenced by the monetary authorities.
Thus, money supply is not set by domestic monetary authorities but, rather, by the behaviour of economic agents holding foreign and domestic-currency denominated assets.
Monetary policy sterility as a result of the adoption of the multiple currency regime has limited the central bank’s role to banking supervision.
The RBZ cannot effectively act as a lender of last of resort because of the loss of seigniorage. The role of the RBZ is therefore largely limited to banking supervision and the smooth operation of the national payment system to ensure financial stability.
The government’s treasury accounts were successfully transferred from a commercial bank to the RBZ in July 2014, thus restoring the RBZ’s function as banker to the government. Cabinet approved the principles for amendments to the Banking Act in June 2014.
Monetary Policy effectiveness in Zimbabwe is also constrained by the following factors: lack of a well-functioning money market; undercapitalisation of the central bank; financial exclusion with the bulk of the population not having access to formal banking; institutional and administrative fragilities.
Evidence has revealed that 85% of the money supply is in the form of cash held by the population without access to the formal banking system. Only 14% of MSMEs are banked ie use formal financial products and services offered by a commercial bank.
Moreover the formal financial system is not deep enough to be an effective channel for monetary policy transmission. The persistent liquidity shortages coupled with low effective demand and a weak South African rand have dampened inflationary pressures in the economy throwing the economy into a deflation mode. Deflation is a very serious problem though perhaps not as serious as hyperinflation.
Deflation implies a lack of aggregate demand in the economy and without demand businesses cannot produce and/or invest and this will weaken the economy. This will also affect government revenues. Deflation is a symptom of a weakening economy and the only cure for it is to pump money into the economy (quantitative easing). This is however not possible under the multiple currency regime.
Developments in the key macroeconomic indicators have seen inflation decline from an average 1,6% in 2013 to an average -0.2% in 2014. The nation registered a deflation of -0,8% in both November and December 2014. Money market rates have have also declined on average. In terms of money supply deposits in the formal banking sector grew by 13,6% from US$3,9 billion in January 2014 to US$4,4 by December 2014. However total banking sector deposits including interbank deposits were US$5,1 billion as at December 31 2014.
There is however some oligopolistic tendencies with a few banking institutions commanding a greater market share of the deposits. The amount that is circulating outside the official banking channels has been put conservatively at US$7,4 billion. In terms of exchange rate movements the South African Rand (ZAR) has continued to depreciate against the United States Dollar (USD) which has eroded export competitiveness.
Loans and advances as at December 31 2014 amounted to US$4 billion and with a total deposit base of US$5,1 billion this translates to a loan to deposit ratio of 78, 9%. In South Africa the average loan to deposit ratio was about 95% in December 2014, in Zambia about 65% and in Nigeria about 83% in December 2014.
The acceptable higher limit of the international standard of the proportion of risky assets (loans and advances) to deposit liabilities is a maximum of 75% for all efficiently run banks.In terms of the sectoral distribution of credit in the economy light and heavy industry accounted for 25% of total credit followed by individuals (21%); agriculture (18%) and transport and distribution (16%.
The preponderance of short-term deposits has constrained the banking sector’s potential to provide effective financial intermediation to productive sectors of the economy. The tenor of lending has remained confined to the short-term at a time when the productive sectors require long-term funding for re-tooling. The bulk of deposits are demand and this has affected the ability of banks to provide long term funding. Moreover, lending has been skewed in favor of consumption as opposed to production.
In terms of the anatomy of the financial system there are currently 19 operating institutions, comprising 14 commercial banks, one merchant bank, three building societies and one savings bank. In addition, there are 147 registered moneylending and credit-only microfinance institutions. On January 15 2015, the Reserve Bank issued the first deposit taking microfinance institution licence to African Century Ltd.
This raises the issue of whether Zimbabwe is overbanked or under banked in light of the size of the Zimbabwean economy (US$8 billion) and the population (market size). In South Africa there are only 17 banking institutions and in Nigeria there are only 24 banking institutions.
Yet South Africa and Nigeria are much bigger economically and financially than Zimbabwe and also have far bigger populations and hence market sizes than Zimbabwe. The financial sector is one of the few sectors that is highly indigenised with only 5 out of the 19 banking institutions being foreign owned. Interestingly the majority of the indigenous banks are struggling.
The financial sector though generally sound has been adversely affected by the high levels of non-performing loans (NPLs). The country had an average non-performing loans to total loans (NPL/TL) ratio of 16% as at December 31 2014. In South Africa non-performing loans averaged 3,4% in 2014, in Zambia 7% and in Nigeria 3%.
International standards allow a level of between 9-12% and an extreme upper level of 15%. This has exerted pressure on the banks’ balance sheets with adverse effects on banks’ lending operations.
The reduction in the total core capital is largely attributed to loan loss provisions and subdued earnings performance by some banking institutions. The factors accounting for the high levels of non-performing loans include: poor corporate governance; inadequate disclosure and lack of transparency; critical gaps in regulatory framework and regulations, uneven supervision and enforcement, weaknesses within the RBZ; and weaknesses in the micro and macro environment.
In January 2015 the RBZ cancelled Allied Bank Ltd’s licence in terms of Section 14(4) of the Banking Act (Chapter 24:20) following a voluntary surrender of the licence by the banking institution. The bank was undercapitalised and was experiencing chronic liquidity challenges. The RBZ has also in terms of section 57 of the Banking Act (Chapter 24:20) applied to the High Court of Zimbabwe for the liquidation of Interfin Bank Ltd. This follows failed attempts to find potential investors. Interfin Bank Ltd was placed under curatorship in December 2012.
Cabinet approved the establishment of Zamco whose mandate is to clean up and strengthen banks’ balance sheets by acquiring NPLs and providing them with liquidity to fund projects. According to the RBZ as at January 31 2015, NPLs to the tune of US$65 million have been acquired by Zamco. The 2015 National Budget outlined additional financial reforms which include: setting up a Woman’s Bank;
strengthening of the anti-money laundering, and introduction of the interbank facility. The credit reference bureau will serve as a credit rating system that will help financial institutions screen loan applicants.
A number of countries have established Asset Management Companies (AMCs) in the past. An Asset Management Company (AMC) is a special vehicle usually created to acquire, manage and dispose impaired banks’ risk assets. It is meant to deal with banks asset quality problems by purchasing the bad loans (assets) of the banks and provide them with cash to enable them promptly resume their roles of lending and general financial intermediation.
In the wake of the Asian economic crises of the late 1990s, most of the Asian countries resorted to the establishment of AMC to assist in taking off the burden of nonperforming loans from the banks to enable them to generate liquidity and resume on their traditional role of lending and intermediation. In Thailand the level of nonperforming loans to total loans was 43% in Thailand in 1998; In Nigeria 26%; In South Korea, several banks closed while India nationalised a huge proportion of its financial system within a spate of three to four years to save them from total collapse.
China, Sweden, Nigeria, Korea, Malaysia, Thailand and Indonesia are some countries that have established AMC at various times.
Some of the benefits of establishing an AMC include: the fact that a bank is able to have access to liquidity made available through the purchase of the loans and the assets. It gives banks the opportunity to remove bad loans from their books and make a clean, fresh start in their core calling of financial intermediation.
It also frees up tied capital by the mere fact that it removes much of the bad debts from the books of the banks thereby putting a stop or bringing a reprieve to the debt overhang in the banking system. Establishing an AMC also helps preserve the economic value of the assets in question. In an atmosphere of distress and illiquidity, the tendency is always high for the affected banks to dispose precious or valuable assets at their forced sales value to enhance cash inflows to abate illiquidity.
However, once these assets have been purchased by the AMC, they can be sold when their due or economic value will be realised. This further assists to prevent price distortions on those assets or market.
In conclusion the fortunes of the financial sector are intricately linked to developments in the macroeconomy as the financial system does not operate in isolation. Experiences of countries that have dollarised in the past have revealed that it is very difficult to dedollarise as it takes a very long time for a country to restore confidence in its own domestic currency. Without our own currency it also implies that we cannot effectively and efficiently control the economy.
What is therefore urgently required are structural reforms that address competitiveness and the high cost of doing business. We also need to improve the quality of our institutions and in particular the quality of our bureaucracy and public administration so as to improve the institutional and administrative capacity for implementing policies.
Prosper Chitambara is an economist and a PhD candidate (Economics) & Development Economist at the Labour & Economic Development Research Institute of Zimbabwe (Ledriz). These articles are coordinated by Lovemore Kadenge, President of the Zimbabwe Economics Society (ZES).
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