New measures to ease liquidity crunch

They expect the measures, which include the restoration of the central bank’s lender of last resort (LOLR) status, to result in the decline of interest rates.
“The repatriation of nostro accounts provides a temporary reprieve to the current liquidity crunch in the market as it gives  banks breathing space to restructure their asset portfolios to bring more cash onto the balance sheets,” said Brains Muchemwa, an economic analyst.

“The unlocking of nostro balances and statutory reserves held by the RBZ is expected to bolster liquidity on the back of an active role of lender of last resort by the central bank. These initiatives will definitely induce some liquidity and activity in the money market,” a banker said.

Banks have been directed to maintain a maximum of 25% of their nostro account  balances offshore to meet their immediate international payment obligations. A nostro bank account is an account that is held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions.

The RBZ said the move was necessitated by serious concerns among stakeholders that deposits mobilised in Zimbabwe were being utilised to support economies of foreign nations.

“With effect from March 1 2012 banking institutions will be required to maintain a maximum of 25% of their nostro accounts balances offshore to meet their day to day international payment obligations,” said Gono. “The maximum amount of nostro balances maintained offshore will be increased to 30% from June 30 2012.”

The repatriation of nostro balances is expected to unlock part of the more than US$400 million believed to be held in foreign banks and ease the current pressures in the financial sector.

Gono said the release of excess balances in nostro accounts and the lifting of previously announced cash withdrawal limits would improve the liquidity situation in the economy and encourage the use of the formal banking system.

But some analysts said the proposed reforms on nostro balances were against the notion of liberalised foreign exchange controls which permit the freeflow of foreign currency in and out of Zimbabwe. They said that the country was currently benefiting from usage of free-flowing funds after it adopted a multi-currency regime and such laws would only increase country risk, which impedes foreign direct investment.

Given that foreign currency balances held at the RBZ were wiped out through quasi-government expenditure at the height of Zimbabwe’s economic crisis, which was characterised by an acute shortage of foreign currency, some corporates prefer to hold the bulk of their deposits in banks through nostro accounts.

But Gono said the central bank remained committed to the continued liberalisation of the exchange controls.
The resuscitation of the lender of last resort by the central bank is expected to reduce interest rate differentials since the RBZ will be able to determine the direction of interest rates through the use of the overnight accommodation rate.

“The lender of last resort functionality will thaw the inter-bank overnight funding costs of banks that are currently very expensive,” said Muchemwa. “As more reasonable and flexible funding options become available from the RBZ, the overall costs of funding liquidity gaps on bank balance sheets come down.”

An increase in the overnight rate will see banks raising their deposit rates so as to attract deposits at a cost less than the accommodation rate offered by the central bank. Banks have been accused of offering very low deposit rates as compared to their high lending rates.

“Eventually that transmits to the lowering of the general levels of interest rates in the market, the exact extent of which will be determined by the proportion of overnight funding to the quantum of interest bearing deposits sitting on bank balance sheets,” said Muchemwa.

With the annual inflation for January at 4,3%, a proper usage of the LOLR tool to manage interest rates should see banks offering real interest rates on deposits to encourage a savings culture, given that the most bank deposits are transitory.

The central bank announced the increase in the liquid asset ratio for banks to 30% in a bid to promote prudential liquidity management.

Analysts said the move will bring down loan-to-deposit ratios for banks, given that the rate averaged 72% by the end of December 2011. This will impact on loan provision to the private sector and ultimately affect credit expansion and growth in the economy.

Muchemwa said: “The increase in liquid asset ratio definitely affects the ability of banks to underwrite more loans, but considering the need to have liquid banks in a tight market, it is more important to have bigger liquid asset portfolios on banks’ balance sheet so that they are able to discharge their obligations effectively and equally reduce impacts of systemic risks.” However, some analysts say these measures are cosmetic and will not resolve the problem mainly caused by a poor balance-of -payment position.

As at February 3, total banking sector deposits had increased to US$3,45 billion whilst total loans remained static at around US$2,78 billion. In proposals to the central bank, Bankers Association of Zimbabwe said the loan to deposit ratio should be maintained at around 70%, 10% below the current 80% average.

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