BANKERS Association of Zimbabwe (BAZ) has called for the re–introduction of an effective and efficiently run money market, saying its absence is stifling economic recovery.
BAZ executive director Sij Biyam told delegates at the Zimbabwe National Chamber of Commerce (ZNCC) annual congress last week in Gweru that government, together with banks, should set up a special fund to finance productive businesses.
“The economy is being choked by the absence of an effective and efficient money market and this has in part led to high liquidity risk as evidenced by the high lending rates,” said Biyam.
Money markets are a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.
The money market is used as a means for borrowing and lending in the short term, from several days to just under a year.
On the proposed fund, Biyam said although government is using a cash budgeting system “this guideline can be relaxed to allow government to borrow within a predetermined limit that takes account of the monthly revenue streams”.
According to Biyam, the borrowings can be used for short-term financing of government needs in order to deal with temporary illiquidity.
“These borrowings would basically entail introduction of Treasury bills which initially could be short term in nature and can be traded in the money market. Treasury bills will then act as collateral security that can encourage interbank lending,” he said.
This would see the reduction in liquidity risks and lowering of the liquid asset holding in banks.
“A properly functioning inter-bank market can influence the lending rates to go down. Broadly, the balances with banks abroad and notes and coins constitute over 30% of banks’ assets, a ration way above the recommended 10%.”
BAZ said pumping money through Special Drawing Rights (SDR) is not a panacea to the country’s liquidity challenges “and when compared to the country’s huge appetite, the current stock of SDRs falls short of the country’s needs”.
“The pumping of money from SDRs should be strategic in order to avoid moral hazards associated with our legacy of providing cheap funds which may not be directed towards production. If the money from SDRs is to be advanced as loans to companies, it should be at agreed market rates and should be more of a revolving fund. Through the multiplier effect, whatever amount is pumped into the economy can generate more funds if it is used productively,” said Biyam.
Last August, for the first time in a decade, International Monetary Fund availed US$512,3 million to Zimbabwe.
Part of the money has been channelled to procure inputs for the 2009/10 agricultural season (US$50 million), rehabilitation of the Hwange Thermal Power Station (US$10 million), road dualisation and bridge construction (US$10,28 million), rehabilitation of rail infrastructure (US$5,02 million), Information and Communication Technology infrastructure (US$6,2 million), water and sanitation projects for Bulawayo (US$6,47million) and Mtshabezi water augmentation project (US$180 000), among other projects.