Eric Bloch Column: Merits of the monetary policy statement

OVER the last seven years, very many Zimbabweans in general, and those in the business community in particular, have developed such an intense hatred for the Reserve bank of Zimbabwe (RBZ) that they cannot conceive of that central bank ever doing anything right and constructive. So pronounced is their contempt for, and criticism of, the RBZ that they have total disregard for the fact that the majority of the actions and inactions which were the source of that contempt and criticism were imposed upon the RBZ by government and by the political hierarchy, and that the RBZ was obliged to comply with the directions given to it, notwithstanding any objection it might have had thereto, and no matter the extent to which it strove to resist such directions.

It is irrefutable that many of the policies and actions of the RBZ between 2005 and 2009 were most ill-advised and were contrary to the normal and usual functions of a central bank. It is equally irrefutable that most of such policies and actions were adverse to the critically-needed economic recovery and in diverse instances intensified the progressive decimation of the economy.

That this was so should not have been wholly attributable to the RBZ hierarchy, for, in the majority of instances, their political superiors determinedly insisted on having their own way, irrespective of any the RBZ views to the contrary. However, criticism of the RBZ is endemic within the majority of the Zimbabwean populace, especially so within the spheres of commerce and industry and other economic sectors.

They berate the RBZ for its failure to accumulate and maintain reserves to support that which was the country’s currency, for spending far beyond its means, particularly so in the provision of motor vehicles, houses and other perquisites to senior civil servants, judges and others, and of farm implements and inputs to selected beneficiaries. They have that which verges on hatred for the RBZ for its expropriation of foreign exchange receipts of individuals and businesses, and for recurrent default in the settlement of debts.

That they do so is wholly understandable, and cannot be dismissed in a cavalier manner, save that the critics wholly disregard the pronounced extenuating circumstance that, with a few exceptions, such deplorable policies and actions were not conceived by the RBZ but forced upon it by superiors who were so driven by own interests that they blatantly disregarded and dismissed the independence and autonomy that should vest in a central bank.

And so great are the critical perspectives of most in the private sector that they automatically perceive only further economic evils and injustices in anything that the RBZ may say or do, including almost all contents of each and every Monetary Policy Statement issued by the RBZ. That has already very widely been the reaction to the latest of such half-yearly statements issued by the central bank on January 31 2012, but in some significant respects, unjustifiably so.

Although various of the RBZ’s operations prior to 2009 were deplorable insofar as they were being conducted by the bank and not, as should have been the case, by government (if they were to be done), since then the RBZ has progressively, and more and more, been engaged in the primary functions of a central bank, although financial and other constraints have not yet enabled it to fully do so. The recent Monetary Policy Statement accords with the ongoing transformation, notwithstanding that the transformation is not yet absolute, primarily due the bank’s virtually non-existent capitalisation.

A key function of a central bank is to supervise banks and other financial institutions and their operations, ensuring compliance with international security considerations (such as the Basel II convention).

In that respect the Monetary Policy Statement records the general soundness of the banking sector “notwithstanding underlying risks posed by the operating environment” including “volatile deposits, absence of an inter-bank market and lack of an effective lender of last resort function, market illiquidity, cash-based transactions and limited access to external credit lines”. Of especial import is the RBZ’s assessment that “the weak and troubled banks are few, small and of low systemic importance.”

The statement records that such banks had a combined market share below 5% in terms of total assets, deposits and loans. But the RBZ is not complacent about the circumstances of those few troubled banks, it recording its concern with the gradual deterioration in asset quality as reflected by the level of non-performing loans, and therefore it is now vigorously prescribing, and enforcing, that such banks recapitalise and become safe and secure.

As at December 31 2011, Zimbabwe had 26 operational banking institutions, 16 asset management companies and 157 microfinance institutions, all under the RBZ supervision. Of the banks and asset management companies, five were not compliant with prescribed minimum capital requirements, with one of the banks imminently becoming compliant by virtue of a concluded recapitalisation agreement.

One of the non-compliant banks has already been placed under curatorship by the RBZ and the rest have been ordered to be fully compliant by no later than March 31 2012, failing which they will not be permitted to conduct banking business. Moreover, the RBZ states that the existing banking laws will be amended to strengthen the Troubled and Insolvent Bank Resolution Framework.

The RBZ has, for some time, prescribed that all banks should periodically conduct stress tests as an element of their risk management, but with effect from the end of the current quarter, all banks will be obliged to submit the test results to the RBZ, pending which it is conducting independent stress tests targetted at gauging the potential vulnerability of individual banks and the entire banking system. Concurrently, the RBZ is emphatically pursuing the implementation of utmost corporate good governance in all banks and other financial institutions, including prescribing that with effect from March 1 2012, they must all have loan provisions adequate to absorb all reasonably anticipated losses.

Fundamental to the security and soundness of any country’s banking resources is that the central bank be a Lender of Last Resort, providing overnight loan funding to any bank with transitional illiquidity. However, for many years, the RBZ has been devoid of the resources to fulfill the Lender of Last Resort functions. Belatedly (but better late than never), this negative circumstance is being addressed.

Government has provided the RBZ an amount of US$27 million, where US$20 million is about to be transferred to the RBZ to supplement US$7 million previously provided, and negotiations are apparently at an advanced stage for Afreximbank to provide the RBZ a lender of last resort facility of US$80 million.

Concurrently, government has undertaken to issue tradeable bonds in order to relieve the RBZ of US$83 million of outstanding statutory reserve balances, although total resolution of the RBZ’s critical insufficiency of capital resources will be contingent upon further measures for the recapitalisation of the Reserve Bank to satisfactory, viable levels.

Thus, the RBZ continues to be confronted with diverse illiquidity constraints but nevertheless, to a significant extent, the governmentally-driven erosion of its capital resources is being belatedly addressed.

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