HomeOpinionMonetary policies push banks to brink of collapse

Monetary policies push banks to brink of collapse

Dumisani Ndlela

IN a short satirical film, a cow urges a little pig to abandon its ambition of becoming a shepherd dog, informing the pig that its reason for existe

nce was to provide meat when eventually slaughtered.

The perturbed pig, which later emerges as a Pig of Destiny after overcoming numerous hurdles, is told by the cow, rather mockingly, to console itself in the fact that in this unkind world, it has to accept that “the way things are, is the way things are”.

While this may not appear to have any relevance to the economic crisis in Zimbabwe, where millions seem to have accepted “the way things are”, bankers have now taken the attitude of the pig in the tale which refuses to accept “the way things are” by taking on the Reserve Bank.

They have rejected the notion that the Reserve Bank is a “sacred cow” — or indeed a “shepherd dog” — which should impose the “way things are” line on the financial services sector although they may not necessarily command the influence of the Pig of Destiny.

After months of prevarication, bankers have finally come out of the closet to warn of bank failures, particularly among the big players, if the Reserve Bank does not act on current monetary policies.

Last week, the Zimbabwe Independent reported that each of the five biggest banks had been borrowing in excess of $1 trillion daily to cover short positions since February, incurring daily interest of over $20 billion.

This was against a background of high statutory reserve ratios which were forcing mainly commercial banks to pay out a large portion of their deposits to the central bank, leaving them with a paltry 70% available for lending but which was locked up in treasury bill (TB) instruments of one form or another.

Moreover, in its fight against inflation, the RBZ has maintained a tight monetary policy, with daily shortages of around $5 trillion.

This has forced banking institutions to compete for deposits by offering higher interest rates to depositors, with many financial institutions ending up in the lurch because their assets cannot sustain such high interest rates on deposits.

With interest accrued on TBs only payable on maturity of the money market instruments, bankers say they are now tottering on the brink of collapse because they are paying interest expenses daily for their borrowings through the RBZ overnight window.

This was proving particularly strenuous on long-dated paper.

With commercial banks now expected to meet a capital base in excess of $1 trillion by September 30 under a new regime linking capital requirements to the US dollar, there are fears this could hasten the collapse of banks as capital accumulated so far is being wiped out by the huge interest expenses arising from daily borrowings.

Independent economic consultant, John Robertson, said the crisis emanates from the fact that government had “captured cash resources and replaced them with paper” under a tight monetary policy framework aimed at fighting hyperinflation.

Bankers allege that prevailing monetary policies, combined with high inflation levels, have created a host of problems threatening their existence. The annual inflation rate shot by 129,3 percentage points to 1 042,0% for April, from 913,6% in March.

The RBZ has consistently raised its accommodation rate in line with rising inflation. The accommodation rate currently stands at 850% and 875% for secured and unsecured lending respectively.

Statutory reserves on demand and savings deposits are currently pegged at 60% and 45% respectively.

Bankers say the most recent change in statutory reserve ratio is a reversal of a policy statement announced on October 20 last year, under which the statutory reserve ratio then was accompanied by the issuance of 180-day and 270-day TBs instead of funds being credited to each bank’s position.

The new statutory reserve policy has ignored the fact that banks had been locked up in unattractive TBs under the old policy. TBs issued under the old policy should therefore have been redeemed or liquidated, they say.

Money market rates are currently hovering around 500%. Bankers contend that the high statutory reserves have caused disintermediation in two major ways.

Firstly, this is directly impacting on the banks themselves which have to cede 58% of all their deposits to the RBZ. This has limited the amount of funds available for lending.

Secondly, the resultant high lending rates under the current monetary regime have crowded out productive sectors of the economy.

Capacity utilisation in industry, bankers say, has largely been low as a result, and there have been redundancies across the manufacturing sector, leading to high levels of unemployment.

“The government is a victim of policies it adopted in the past,” says Robertson. “It has destroyed savings and is now struggling to find money.”

Robertson says savings are critical in promoting investment and economic growth. Moreover, if government had promoted savings through sound economic policies, it could easily borrow from the market without necessarily raiding banks for funds through the high statutory reserve requirements.

Moreover, the latest policy militates against government’s pronounced economic revival agenda under the recently launched National Economic Development Priority Programme (NEDPP).

The NEDPP, described by the government as a joint economic revival effort by government and the private sector, is expected to create economic stability within the next six months.

Under the NEDPP, the government plans to mobilise US$2,5 billion within the next three months, boosting efforts to stabilise the economy, reduce inflation and increase agricultural production.

The programme also aims to enhance savings and trigger investments inflows.

Gross national savings are estimated at aound 10% of gross domestic product (GDP). Economists say to stimulate investment growth, gross national savings should be upwards of 60% of GDP.

But as a result of significant funds being tied up in statutory reserves, banks have not been able to mobilise savings because of the costs created under the new statutory reserve requirements and policies related to financial sector support for TB instruments.

“The seriously illiquid situation on the market is a crisis. The RBZ has to react to this. Everything should be done in moderation. Tightness should not amount to strangulation,” says Robertson.

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