LOW nostro account balances and a surge in government borrowings last year triggered biting liquidity shortages, a report on the country’s financial situation has shown.
By Bernard Mpofu
According to a research note by Zimnat Asset Management, low confidence in the economy could trigger capital flight.
The financial system experienced a cash crunch late last month that saw most banks capping daily maximum withdrawals to US$1 000.
Official figures show that the amount of Treasury Bills (TBs) issued by government increased significantly in 2015, with over US$1 billion worth of TBs being issued between March and December 2015.
“Most of the TBs issued during this period, were to beneficiaries that were owed money by government and therefore upon receiving the TBs, the beneficiaries sold the TBs on the secondary market to local investors at various discount rates. What compounded the depletion of bank nostro account balances was the fact that the cash received from TB sales on the secondary market was almost immediately used to import goods and services, whilst in some cases, the funds were repatriated or externalised by the beneficiaries,” said Zimnat Asset Management in a report titled Banking Sector Cash Crunch for the month of March.
“This basically means that the local RTGS US dollar receipts from TB discounting, added further pressure on bank nostro accounts and this all happened at a time when banks were required to maintain 5% of their total deposits in nostro accounts. The pressure ultimately resulted in the delaying of international payments and then eventually into the current cash shortage,” Zimnat said.
Reserve Bank of Zimbabwe governor John Mangudya could not be reached for comment at the time of going to print. Last week he said the situation was caused by an unanticipated correlation between the timing of public and private sector salaries and bonuses.
Under the multi-currency regime adopted in 2009 following unprecedented runaway inflation, commercial banks are responsible for importing cash into the country and can only undertake this function if they have adequate funding available in their nostro accounts to purchase notes for their clients.
A nostro account is a bank account 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.
Experts say banks have witnessed increased pressure on their nostro accounts because of the widespread importation of goods and services into the country, against a declining exports revenue and other forex inflows base, resulting in banks failing to import cash to meet their client’s needs. Zimbabwe has a trade deficit of nearly US$3 billion making the country a net importer in a dollarised environment.
“According to our bankers, close to 90% of the money circulating locally under the RTGS platform is not backed by nostro account balances anywhere. This therefore means that, the currency cannot be used for making international payments and can only be used for domestic transactions only. Since the inception of the multicurrency regime, this local RTGS US dollar currency has been growing each year through private credit creation and most recently through the rampant issuing of TBs, i.e. public credit creation,” the report reads.
“The new exchange controls coupled with delays in transferring large sums of money outside of the country may result in capital flight as foreign investors fear that their money may not be safe, given the instability within the country’s financial system.”