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A LOW key but nonetheless focused monetary policy statement with less rhetoric than usual was presented on January 29. This was a major departure from the grandstanding which the country had come to expect every time the monetary authorities took to the podium between 2003 and 2008.

The talking point on the statement so far has been the failure of the Reserve Bank of Zimbabwe to redeem gold bonds at maturity. These bonds were issued to gold mines for unpaid gold deliveries to Fidelity Printers & Refiners, a subsidiary of the RBZ.


The Special Tradable Gold-backed Foreign Exchange bonds were issued in January 2009 with a tenor of 12 months and an interest rate of 8%. Few mining houses managed to sell the bonds to the banks and pension funds at discounts as high as 30% to raise liquidity for working capital. Many prospective takers of those bonds on the secondary market shunned them because they were worried about the creditworthiness of the issuer.


Teir caution has since been vindicated. As largely feared by many, the central bank has failed to pay up on maturity. Instead they have rolled the bonds over for a further six months. With the central bank having been relieved of some of its income generating operations, it looks largely unlikely that it will be able to meet all outstanding obligations from its own resources. The plan, it seems, is to transfer the indebtedness of so-called “government’s RBZ-held debt” from the central bank to the central government. This will merely add on to government debt without improving the chances of repayment of these obligations.


Already the government has external debts of US$3 465 million including arrears of US$2 317 million. The obligations increase to US$4 290 million after adding on government-guaranteed debt owed by public enterprises. An addition of a further US$1 billion or so of domestic debt, most of which was used to fund consumption, will only further worsen the indebtedness of central government. With revenue collections currently being lower than expenses, it will be folly for anyone to expect government to prioritise paying debts.
Financial institutions which jumped onto the gold bonds because they were being offered at big discounts might live to regret their decisions. The returns on these instruments were high but the risk was high as well. It may end up just being paper money that may not be realised soon, if at all. There is little hope that the bonds will be paid off after the six months roll-over period. This may call for the impairments to be done on the affected institutions’ financial statements.


The gold bonds debacle should remind investors that default risk is still high in this country. Many borrowers are failing to settle their obligations when they fall due largely because they are not generating adequate cash flows. It is clear from the monetary policy statement that most banks remain uncomfortable to give out loans. Only 48,2% of the total deposits amounting to US$1,33 billion were given out as loans and advances. Even such banks as CBZ and FBC which are believed to have most of the public sector deposits are also cautious in their lending. CBZ bank, with deposits equivalent to 27,5% of the market, gave out 61,8% to borrowers. The most aggressive banks were NMB, Agribank, MBCA and CFX with loans to deposit ratios between 70% and 200%. Amongst the commercial banks FBC was the meanest after lending only US$16,3million (16,6%) out of deposits totaling US$98 million.


Manufacturers received the highest loans amounting to US$142 million or 22% of the total. The next in line was the distribution sector followed by agriculture while the least favoured beneficiary was the construction sector.


The RBZ, in contrast, recommends that agriculture should be allocated the most credit of say 30% with manufacturing and mining getting 25% apiece while the other sectors share the remaining 20% of loans and advances. RBZ bases its recommendations on the relative contribution of the sectors to the national income while banks are considering the relative creditworthiness of the borrowers.


It is obvious that local banks cannot sufficiently fund this economy alone. Foreign participation is needed for local industry to increase production. The foreigners have publicly expressed interest in doing business in this country provided the conditions are supportive of private investment. A small price to ask, but, not, apparently, when dealing with politicians.


Ranga Makwata

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