THE global financial crisis has left bankers and economists wondering if the local banking industry can withstand a similar shock in the current macro-economic environment, if interest rates are hiked or liquidity conditions tightened.
Currently local banks are benefiting from excess liquidity coming from the Reserve Bank which has been printing money to make up for depressed production.
Zimbabweâ€™s financial sector is characterised by low interest rates relative to high inflation, and depreciation of the currency against major trading partners.
This has ignited speculative activities as both banks and individuals have been borrowing money to buy shares and foreign currency for such purposes.
Banks could experience a serious liquidity crunch similar to that experienced five years ago if a new government stops expansionary policies characterised by the seemingly unstoppable printing of money.
Most banks have few treasury bills on their balance sheets which is a requirement when securing liquidity from the Reserve Bank.
At the official hand-over of licences for foreign exchange licensed retailers and wholesalers, Reserve Bank governor Gideon Gono said he would not stop printing money which ensures survival of major sectors of the economy that have been depressed.
“What is different with what the Federal Reserve (Fed) is doing to rescue its country and other markets from what this governor has been doing?” Gono said in response to the (Fed) proposal to print money to rescue US economy.
“When it happens in their country they do not see anything wrong with it but if it is a Reserve Bank governor from Zimbabwe they say it is wrong,” he said.
Gono said central banks in America and England should not be quick to judge when other countries are printing money to ensure that their people survive.
“The only difference with them (Fed) is they can print money and import as much oil the following day, while our currency will circulate within our boundaries.”
The International Monetary Fund has been critising the central bank for excessive money printing.
In their 2004 Article IV Consultations report on the actions by Gono when he created a lifeboat fund for troubled financial institutions, the International Monetary Fund said: “. . . the liquidity support provided was large and dear, weakening monetary control and potentially worsening the underlying problems. A few other banks continued to have liquidity problems and appropriate mechanisms needed to be put in place to deal with them through recapitalisation or closure.”
In April 2007 the IMF also said Gono had pumped money into collapsing financial institutions saying this was wrong. Economic analysts said while Gonoâ€™s intentions were for a noble cause, doing so without production was suicidal to an already collapsed economy.
“Their countries (America and England) do not have high budget deficits. They only print such large amounts of money to stabilise markets not for quasi-fiscal activities. They will sell back the asset to the private sector once their economies stabilise,” said a bank chief executive who declined to be named.
“Printing of money should be debated in parliament as was the case in America and it was shot down. It is not a one-man band like in our country,” he said.
Local banks such as Royal, CFX, Trust, and Barbican were placed under curatorship in 2004 after the Reserve Bank said they were not financially sound.
Following the financial crisis, most governments in Europe markedly revised their economic growth forecasts for 2009.
Unless global credit markets thaw and start lending funds again, the much deeper and more prolonged recession that many suffered in the early 1990s will look increasingly possible.
US president George Bush this week vowed to fight to rescue the US economy as world leaders pressed for action on Tuesday after his US$700 billion bail-out plan was rejected by Congress.
For the second year-running global markets reeled from the fallout of the financial crisis, central banks pumped in more billions and European governments rescued their banks.
Bush declared that the rejection of the rescue plan was “not the end”.
“The reality is that we are in an urgent situation, and the consequences will grow worse each day if we do not act,” said Bush.
Globally, markets went haywire, however, gyrating wildly as traders looked for direction and because the vital money market for banks has been strangled for days.
World leaders clamoured for urgent action, with German Chancellor Angela Merkel urging another vote on the plan this week to restore market confidence.
British Prime Minister Gordon Brown sent a message to the White House to underline “the importance that we attach to taking decisive action”.
New Japanese premier Taro Aso said: “We should not let the world financial system collapse.” And Australian Prime Minister Kevin Rudd said he and other US allies would press Washington to take action.
US Treasury secretary Henry Paulson warned US lawmakers they had to act fast after the dramatic rejection by the House of Representatives of the plan to buy out banksâ€™ bad debts.
“Markets around the world are under stress,” said Paulson, architect of the proposal to buy up the mountains of bad mortgage-related debt behind a wave of home foreclosures and spectacular bank failures.
“We need to get something done â€¦ This is much too important to simply let fail.”
Central banks again poured money into markets in an attempt to revive the global banking system .
French-Belgian bank Dexia was rescued by the French, Belgian and Luxembourg governments which put in euro 6,4 billion. Governments had already stepped in to save Dutch-Belgian bank Fortis and Britainâ€™s Bradford and Bingley this week.
French President Nicolas Sarkozy called a pre-dawn meeting of key advisers and after talks with top bankers promised measures before the end of the week.
A senior official in his office said: “Banks are in trouble in Germany, Belgium and Great Britain. We feel a bit surrounded.”
France and Ireland reassured people with deposits in banks that their money was safe, echoing similar statements across Europe.
Some analysts now suggest there could be concerted central bank action to cut interest rates because likely economic slowdown, even recession, arising from the crisis would sharply cut inflationary pressures.
By Paul Nyakazeya