It was not surprising to note that with debt levels still at 103% of GDP there was an inadequate conservative US$2,7 billion against the ballooning balance-of-payments deficit while capacity utilisation in various economic sectors struggle to surpass 50%.
The scenario looks complicated and a daunting puzzle for the national treasury given that there is need of substantial external financial support at the same time as the country’s capacity to settle its debt burden is crippled because of the unforgivable sovereign risk. Last week, government was reportedly negotiating with regional financiers to raise about US$150 million for the next fiscal year to complement its option of a cash budget.
There has been an increase recently in the positive relationship between gradual improvement in capacity utilisation and the supply of long term credit.
Despite the notable growth in bank deposits from US$2,1 billion to US$2,3 billion, the market remains short of critical long term liquidity to grease the wheels of the economy.
At this level of deposits, banks have been accused of failing to support the economy through extending credit, even though the loans to deposit ratio increased from 52,45% to 64,4%. Bank deposits have been largely demand or short-term deposits for quite a long time and this means that banks cannot adequately meet the current 180-360 day financing requirements.
This again has resulted in the high cost of funds available for working capital, which is already above 20%. Consequently, the effect has been an increased cost of production resulting in locally produced products being less competitive against imports. There is a currently tabled proposal for a Statutory Instrument to compel banks to publish deposit and lending rates, in a bid to regularise lending; but this alone does not imply that money for long term projects would become much more readily available.
While the aforementioned liquidity situation is painful to needy sectors, local banks still have an important role to play in helping improve capacity utilisation. Recently, banks have shown commitment in trying to mobilise long term finance for the economy. F
or example, the current work in progress of a US$70 million diaspora bond by CBZ and Afreximbank, to mobilise funding, is a good leap in the effort to raise long term funds for the economy. Furthermore, Agribank and ZB Bank also launched US$10 million and US$30 million 360-day bills, respectively, aimed at financing the agricultural sector mainly tobacco and livestock production.
The major impediment to such noble initiatives is the loss of confidence, a lender of last resort limitation (currently at US$7 million) and Zimbabwe’s prolonged fall in the doing business indices which continue to cloud development prospects. This might be a reason why reception of these products remains significantly very low resulting in a stagnant secondary market with loan products limited to bankers’ acceptances.
In an effort to complement local banks’ efforts, the current increase in the participation of regional banks like PTA Bank, Afreximbank, Industrial Development Corporation and Development Bank of South Africa (DBSA) has helped to improve capacity utilisation in various sectors. Long term finance at a lower cost is essential to ensure growth.
However, the agriculture sector has largely been on the receiving end of this multilateral assistance for instance through the recent approval of a $14.6 million corporate loan by DBSA to support the Cotton Company of Zimbabwe.
While the formation of Zimbabwe Economy and Trade Revival Facility is a good initiative, the government needs to strengthen its partnership and improve cooperation with these regional financial institutions.
These financing initiatives also need to be coordinated and extended to other sectors like manufacturing and mining to even the growth trajectory. The energy sector needs to be a prioritised recipient as growth in this sector can then be transmitted to other various sectors of the economy.
The country continuously mourns “mattress or pillow” banking and lack of the financial sector’s support but there is no evidence of a significant change in the immediate future. Hence, negotiating for long term finance is the sole panacea to realise the forecast growth of 9,3% in 2011.
The government does not need to be the ultimate recipient of the finance as local banks are capable of appraising the eligible sectors with the ability to repay the loans.
Many local companies are not willing to exchange equity for the required liquidity and the capital requirements to satisfy the current regulations concerning local ownership are as yet unclear. At the same time, their operations are in need of funding.
Lack of fiscal space continues to be a constraint unless the government reengages multilateral financial institutions to partner with local banks to avail seed capital to the ailing corporate entities.
It is imperative to acknowledge that an internally financed budget is not a panacea to solve this problem as this just compels the country to continue riding on the current unhealthy dependency on Vat which is the highest in Southern Africa at 39,5%.
Without long term finance which can ensure optimal performance across various sectors, the projection of a budget surplus in 2011 is likely to be over-optimistic and corporate balance sheets and income statements will continue with their current bleeding.