BANKS have painted a gloomy outlook of the operating environment, warning tight liquidity conditions prevailing in the market would persist into the future worsened by deteriorating domestic production and a widening current account balance.
BY CHRIS MURONZI
In a presentation to the parliament budget workshop, Bankers Association of Zimbabwe (Baz) last week said growth in exports had remained low, averaging less than 1% on a monthly basis over the past year against a background of rising imports and low domestic industry production.
An expansion in imports against static exports means that the current account continues to widen and the economy is haemorrhaging.
Baz said lines of credit remained limited and high priced due to the risk premium attached to the current external debt and arrears.
Zimbabwe has an external debt of US$10,7 billion.
The high risk premium on the external debt has become an albatross on the economy, the banks said.
Apart from liquidity challenges, the short-term nature of deposits has also become a headache for the sector, banks said.
According to Baz, 83% of total deposits are transitory.Transitory deposits are funds held in bank accounts from which deposited funds can be withdrawn at any time without any advance notice to the banking institution. These can be “demanded” by an account holder at any time.
Banks also expressed worries over rising non-performing loans (NPLs).
“Compounding the liquidity challenge is the growing portfolio of NPLs, now at about 16%, compared to 12% last year. This is amplifying the liquidity challenges,”the banks said.
Analysts feel banks are understating the level of non-performing loans in the sector amid anxiety banks are not providing adequately for bad loans.
The sources of liquidity are exports, lines of credit, Foreign Direct Investments (FDI) portfolio investment, diaspora flows (unrequited transfers).
“The economy is not realising any significant FDI and portfolio inflows and attracting required capital in key sectors of the economy will largely correlate with building of confidence in the economy. Diaspora inflows have been adversely affected by the slowdown of the global economy. In addition, there is no framework guiding diaspora investment, to cater for Zimbabweans who want to invest their funds,” Baz said.
“The banking sector is characterised by serious liquidity constraints and generalised banking sector vulnerabilities such as a slowdown in broad money supply growth, since the beginning of 2012, with lowest growth rates being recorded in 2013. Broad money grew by 12,23% in May, declining from 14,85% growth in April; Broad money registered the lowest annual growth rate since the introduction of the multicurrency system, with growth of 10,47% in March,” Baz said.
Five major banks account for about 63% of total deposits, an indication of heavy concentration of the deposit base.
The economy is currently haemorrhaging via the current account, as the balance of payments continues to deteriorate, reflecting low and declining domestic industry capacity utilisation levels, banks noted.
Baz added Finance minister Patrick Chinamasa needed to address a plethora of problems besetting the banking sector and stimulate the economy.
The association said the decline in economic activity in the country had dried up sources of funds for onward lending.
Banks said addressing the sector challenges such as the capitalisation of the RBZ, restoring RBZ lender of last resort function, restoring RBZ banker to government function, strengthening RBZ supervision and oversight function, repayment of corporate FCAs, developing money and capital markets, retention of multicurrency, capitalisation of commercial banks, flexible approach to measures on indigenisation of foreign banks, an effective external debt arrears clearance programme, engagement with regional institutions for lines of credit, engagement with multilateral institutions, revisiing the MOU and deposit protection board subscriptions and enhanced financial support for agriculture will correct the situation.
“As part of an integrated plan to restore confidence in the banking sector, it is imperative that the Reserve Bank of Zimbabwe be adequately capitalised by government. Adequate capitalisation of the central bank will enable the Bank to play its Lender of Last Resort function, as well as activation of the interbank Market,” said Baz.
“As highlighted above, adequate capitalisation of the central bank is critical for the performance of lender of last resort function. The lender of last resort function is an integral part of money and capital markets development. In addition, the government must issue both short-term (treasury bills) instruments and long-term bonds for both money and capital markets development.
Banks believe the function of banker to Government, which was transferred to commercial banks in 2009, could help the orderly functioning of money and capital markets, development and create an even playing field for other commercial banks.
“An important step in addressing banking sector vulnerabilities requires that the Reserve Bank of Zimbabwe, supervisory and oversight function be strengthened. The RBZ requires capacity building and strengthening to allow the central bank to undertake on sight supervision and audit of the banks to ascertain capital levels, risk management frameworks, stress testing and levels of NPLs, among other things,” said banks.
Banks want Finance minister Patrick Chinamasa to retain the multicurrency system and feel the economy has to fulfill certain pre-conditions before re-introduction of the local currency, adding this would help restore confidence in the economy.
Baz said : “In light of the recent legal developments and possible litigation against Commercial banks, it is more urgent now to address the above to minimise uncertainty. Baz recommends that the 2014 Fiscal Budget incorporate payment plan for Corporate FCAs. The Government could issue debt/coupon instruments of varying maturities covering all the Corporate FCAs.”
Baz said, although appreciated, the statement by the Governor of the Reserve Bank Gideon Gono extending the time lines for capitalisation of banks, banks feel monetary authorities could give a specific extended deadline for capitalisation.
Banks added government has indicated their readiness to modify the Indigenisation and Economic Empowerment framework to incorporate sector-specific factors and also to focus more on wealth creation, rather than distribution. This is a commendable approach and Baz supports the new approach, which has beneficial wider positive gains for the economy.
In its recommendation to Chinamsa, Baz recommended that a deposit protection fee limit be set at 0,3% and a cap of US$50 000 be considered as contributions to the Deposit Protection Board.
“As highlighted above, NPLs are impinging on banks capacity to extend lending. It is recommended, as was done in Malaysia and Nigeria, that a Special Purpose Vehicle be created to house NPLs.
Funding could be through long term bonds. The institution could be private or public but adequately protected by relevant legislation.
Some years back, this was also done for ZB (Climax) and CBZ (CBZ Nominees) and these arrangements were sufficient to allow the banks affected to avail new credit,” Baz added.
“Improving liquidity conditions is critical for revival of the economy and growth. In this regard, it is prudent that the Government focuses on securing lines of credit from regional institutions such as the PTA Bank, AfDB, Afreximbank, DBSA and IDCSA. These institutions have traditionally supported Zimbabwe, under Western imposed sanctions and have provided critical lines of credit for the economy.”
Baz added government must engage multilateral institutions such as IMF, AfDB and World Bank, come up with an effective external debt clearance and enhanced financial support to agriculture.