In an exclusive interview with the Zimbabwe Independent this week, Gono revealed that the central bank was taking aim at problems arising from the lack of a vibrant money market, the widening gap between deposit and lending rates and the subsequent lack of a stable interest yield curve.
Gono contends that the financial market is liquid but the problem lay in the immobility of funds within the banking sector. He said the overall market position was in huge surplus, averaging US$100 million in 2011 and as high as US$386 million as at March 19, 2012.
“One of the major reasons for the silos or pockets of surpluses is the absence of a properly functioning money market. Banks are therefore not willing to take risks among themselves, especially in a market where acceptable collateral is limited or not available at all,” he said.
The RBZ governor lamented government’s decision to bank with some commercial banks as this resulted in those financial institutions assuming some of the functions of the central bank, including that of Lender of Last Resort (LOLR) but without the ability and legal mandate to perform that function.
Neither can commercial banks conduct open market operations. This refers to purchases or sales of government securities and commercial paper by a central bank in an effort to regulate money supply and influence credit conditions. When the central bank buys these securities from banks, liquidity increases, while the reverse applies when it sells.
Gono said one of the biggest distortions in the Zimbabwean economy related to interest rates, noting that, “there is such a wide margin between deposit and lending rates and no properly discernible yield curve”.
He said the interest rates regime currently prevailing was distorted, resulting in bad signalling to the market. Normally, monetary authorities guide the interest rate structure of the economy through the bank rate or overnight accommodation rate.
Nominal lending rates quoted by banks have ranged between 8% and 32% with most banks quoting average lending rates of around 20%. However, deposit rates have ranged between 0,15% for savings accounts and up to 17% on time deposits.
With the government operating on a strict cash budgetary framework, the market has been starved of short-term, tradable securities, especially treasury bills, which were the most widely-traded instrument. This has resulted in the money market being dormant and with it the inter-bank market.
Gono said urgent action needed to be taken to bring government back to the market to issue credible, well priced instruments of varying maturities that will cater for the needs of the market.
While the issuance of instruments will result in an interest cost to the government as well as the accumulation of domestic debt, the benefits to the economy are much wider. The instruments will allow for the resuscitation of the money market and also lead to the re-activation of the inter-bank market.