The now not so visible governor said the removal of statutory reserves was meant to ensure improved liquidity and low interest rates.
However, analysts have expressed different opinions on the latest move with some saying while it was welcome, the unlocked funds would not translate into meaningful activity on the market. They also argue that the funds would have very little or no impact on interest rates.
Statutory reserve ratio for banks is defined as a percentage of a bank’s deposit holdings that must be preserved by the Reserve Bank as a form of security.
According to the monetary policy statement Zimbabwean banks were required to lodge a cumulative 5% of both offshore and local deposits as statutory reserves. This money is sometimes used as a tool to regulate liquidity.
Players in the industry asked if the removal of statutory reserves for banks will result in the injection of millions of dollars onto the market. Will interest rates go down? Can liquidity and banks’ lending capacity improve? Will the top four banks – CBZ, Standard Charted Bank, Stanbic and Barclays —that hold 60% of the country’s deposits lend for productive purposes now that they have access to the money?
As at May 31, the depositor’s base stood at US$1,8 billion, of which 60% of these funds were controlled by the four banks. US$1,1 billion was advanced to various sectors as loans.
By maintaining statutory reserves in an economy like Zimbabwe, Gono may have locked up funds that could have been used to rejuvenate and expand the economy.
Analysts said statutory reserves are only appropriate in a hyperinflationary environment where money supply would be rising at very astronomical levels.
Farayi Dyirakumunda, an executive director of African Investment Markets, told the Zimbabwe Independent on Wednesday that statutory reserves were among the monetary policy tools available to the Reserve Bank as they work towards influencing interest rates and availability of credit in the economy.
“The reserve ratio has a bearing on money supply, therefore the recent moves by the Reserve Bank to cut the reserve ratio to zero percent will result in a corresponding increase in the monetary base,” he said.
He said in economic terms, money supply was influenced by the monetary base and money multiplier so the latest policy was in theory positive in that it enhanced the potential of the banking system to create further transaction deposits.
“If the reserve ratio is raised, say in an inflationary environment, the amount of money available for lending is automatically reduced, effectively slowing down economic activity. Equally, a reduction in the reserve requirement in our current environment can potentially increase the amount of money available for lending and this has a simulative effect in the economy,” said Dyirakumunda, who is also an economic analyst.
Dyirakumunda, however, said an absence of statutory reserves will diminish the central bank’s lender of last resort ability, suggesting the need to recapitalise the RBZ for such purposes.
“One of the reasons for statutory reserve requirements is to ensure that financial institutions are sufficiently liquid and capable of paying claims even in a calamitous situation,” he said.
“The presence of statutory reserves also enhances the perception of stability for a nation’s banking industry. A zero percent reserve ratio therefore necessitates a prudent approach to lending by banks in the absence of a lender of last resort,” Dyirakumunda said.
Analysing the recent monetary policy this week, Stanbic Bank said: “The lending capacity of banks is not likely to immediately improve due to other considerations, including the need to comply with increased liquidity ratios and Basle 2 requirements.” Basle 2 is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations.
Economist David Mupamhadzi said Gono’s latest move was commendable from a policy perspective and would release some liquidity into the system.
“However its impact on interest rates and on the ability of the financial sector to meet the demands of industry will be minimal. There is still need to inject some life in the financial sector for it to be able to adequately support the turnaround efforts,” Mupamhadzi told the Zimbabwe Independent this week.
Mupamhadzi said restoring the lender of last resort’s function at the apex bank was crucial but should be accompanied by fundamental reforms for the bank to improve its credibility.
“The recovery of the economy can only be sustained if it is supported by a well functioning financial sector. Confidence of investors in the financial sector starts from how people perceive the central bank,” he said.
Interest rates at between 12% to 18% are said to be too high and inconsistent with a dollarised economy.
“This adversely affects the competitiveness of local companies, and the demand for local goods in the region and beyond. There is need for economic players to shift their mind set from the hyperinflationary era to the new dispensation,” Mupamhadzi said.
Economist Brains Muchemwa said abolishing statutory reserves would unlock more funds for lending and lowering of interest rates under normal circumstances. But because the central bank raised the liquid asset ratio to 20% from 10%, little funds would be channelled towards lending as banks will need to keep more liquid assets on their balance sheets to meet this requirement.
“The interest rate determination in Zimbabwe is closely correlated with the underlying economy-wide liquidity levels, credit risks and indeed the existing interest rates,” Muchemwa said.
“Though high when compared to inflation, mirroring these risks and lack of sufficient market and policy signalling instruments will add more distortions in the determination process, resulting in the high levels of interest rates that vary widely from one bank to another,” said Muchemwa.
Enterprise Risk Management Services Lead Consultant Sonny Mabheju told the Independent that the amounts unlocked by banks would depend on individual banks’ decisions on issues like assessed risk in the market and other factors normally considered when making prudent lending decisions.
“Some banks may deem the risk profile to be too high and other factors in the business environment not yet appropriate for them to significantly change their lending policies,” Mabheju said.
“The impact on interest rates will, among other factors, also depend on the lending decisions and consequently the volume of funds put on the market. If the unlocked funds are insignificant, they will not have much impact on market liquidity and consequently the impact on interest rates arising out of these funds will be minimal,” said Mabheju.
He said the prevailing interest rate regime was a result of many complex forces at play in the market.
ve would place liquidity management wholly on the shoulders of banks.
“Some banks have started implementing these liquid assets measures well after the central bank made them mandatory,” said KSB.
Seeing that the Reserve Bank was no longer able to perform the lender of last resort function, some prudent banks have started keeping larger amounts of reserves (liquid assets) in their vaults of at least 20%, up from 10% during the Zimbabwe dollar era.
“This was because then banks had an easy fall-back position through the inter-bank market and as a last resort, the central bank,” said KSB.
Economic consultant Eric Bloch told the Independent on Wednesday that the abolition of statutory reserve obligations would accord banks “somewhat” increased liquidity, enabling some enhanced levels of lending, thereby benefiting under-capitalised business enterprises.
“Engaging in a greater volume of lending will facilitate some lowering of interest rates, as lenders progressively benefit from the economies of scale,” said Bloch.
Bloch however said the quantum of statutory reserves fell far short of market funding needs. He said, as a result there would be ongoing constraints on business’ access to adequate working capital, and the increased lending volumes would not suffice to bring about alignment of interest rates with international norms.
He said current interest rates were high and interest “should be aligned with international norms, but not exceeding the rate of inflation”.
“This would ensure greater stability of enterprise operating costs and, therefore, of selling prices, which would boost consumer demand and hence stimulate increased production,” he said.