HomeBusiness DigestEric Bloch Column: The banking crisis, far-reaching effects

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They have prescribed several remedial measures but, despite their merit and pending those measures being implemented and becoming effective, the crisis is intensifying. Consequently, the economic recovery pursued since 2008 is now being severely retarded and reversed.

A stable and effective banking sector is a prerequisite for the continued viability of any economy. Tragically, that prerequisite is rapidly ceasing to exist in Zimbabwe. With a few significant exceptions, over the last few weeks the majority of Zimbabwe’s banks have had a serious insufficiency of cash resulting in a pronounced rationing of bank notes when customers have sought to effect withdrawals from their accounts. 

 

The primary cause of that scarcity is that many businesses, and a majority of the general populace, are reluctant to deposit their funds into the banks.  That unwillingness to avail themselves of banking services is motivated by two major concerns.  On the one hand there is a wide-ranging concern that Zimbabwe will dispense with the prevailing multi-currency regime, and will revert to its own currency. 

 

The fear of those with funds is that if Zimbabwean currency is restored, government or the RBZ will unilaterally expropriate the foreign currencies held in the banks and compensate them with the reinstated domestic currency, and that that domestic currency would soon become as worthless as it was in late 2008.

Compounding those fears is wide-ranging awareness that several of Zimbabwe’s banks are very substantially under-capitalised and risk collapse, in which event much of any funds deposited with them would either be irrecoverably lost or, at best, would only be partially or wholly recovered after an extended period of time. 

 

Those fears are intensified by recognition of many that, in consequence of interbank lendings and transactions, even the survival of adequately capitalised banks could well be in jeopardy as a “knock-on” effect of the possible collapse of the under-capitalised institutions.

Yet another fear of very many is that the pursuit by government of Zimbabwe’s foolhardy and counter-productive indigenisation policies can (and probably will) result in changes of ownership and control of many banks to new owners devoid of substantive knowledge and managerial expertise of financial institutions. 

 

As a result even fully capitalised banks could, in the future, cease to be secure havens for depositors’ funds, and especially so as those indigenisation policies and their probable resultant ownership changes are deterrents to international banks and other financial institutions extending lines of credit to Zimbabwean banks.

The magnitude of financial sector illiquidity is so great that not only are many banks unable to service fully depositors’ cash withdrawal needs, but in addition are failing to timeously credit clients with interbank transfers (RTGSs).  Those businesses and other banking clients that make payments to suppliers and other third parties by way of interbank transfers are immediately charged for the amounts of their payments, and for service charges thereon, but in numerous instances the intended recipients await credits to their accounts for extended periods.

The negative economic repercussions of these banking sector ills are gargantuan.  Manufacturers and traders are not receiving delivery of inputs and goods until the suppliers have received the attendant interbank transfers.  The already constrained purchasing power of consumers is further contracted by the insufficiency of funds that they have sought to withdraw from their banks. 

 

As a result, trade volumes are markedly reduced, and the drop in consumer demand is a major fuellant of inflation, which is likely to soar upwards if the money market illiquidity is not rapidly resolved.  The belated receipt of manufacturing inputs, and the decreases in consumer demand, are also likely to force many manufacturers to reduce their labour forces, thereby worsening Zimbabwe’s already high levels of unemployment.

Recognising these and attendant factors, on February 16 Biti and Gono issued statements comprising policies to be pursued in order to restore viability to the banking sector (and hence to the economy as a whole), in part reaffirming previously prescribed policies as contained in RBZ’s monetary policy statement issued in January, 2012, and partially announcing yet further policies.  Some of the key issues addressed were:

All banks whose capitalisation was less than the RBZ prescribed minimum had been obliged to submit recapitalisation plans to RBZ by February 14 2012, and such recapitalisation must be wholly implemented by March 2012, failing which banking licences would be terminated, or defaulting banks would be obliged to merge with other banks thereby achieving consolidation and enhancement of the capital resources.

Moreover, Biti recently stated that Zimbabwe is grossly overbanked, having 26 licenced banks (over and above 159 money-lending institutions, building societies, and discount houses).  He said that as a matter of urgency, the banking sector must be reconstructed to comprise a maximum of 10 banks, be such reconstruction achieved by way of mergers of banks or by bank closures.

With effect from March 1, 2012, all banking institutions may hold no more that 25% of their Foreign Currency Account (FCA) balances in offshore Nostro accounts, which the banks utilise to meet their day-to-day international payment obligations, although that ceiling of offshore holding may be increased by the banks to 30% with effect from June 30, 2012. 

The policies are commendable measures to address the intensifying banking sector crisis, and the concomitant adverse economic repercussions, but they are unlikely to suffice and, in particular, will not achieve the rapid transformation of the sector desperately needs.  In order to accelerate the recovery of the unfavourable banking environment, at least two further actions should be rapidly and effectively pursued.  These are:

The Finance minister should forthwith draw down the unutilised balance of IMF Special Drawing Rights (about US$150 million) which have been lying idle in the United States for almost two years, and should utilise that drawdown to stabilise the banking sector.

An authoritative statement should be issued by government, convincingly reiterating the previously announced policy that Zimbabwe will not revert to its own currency in place of the multicurrency regime until the economy is fully stabilised, and consistently on a substantive growth path, the earliest date for such reversion to own currency being 2014.

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