RBZ mustn’t hesitate to scrap bad policies

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THE banking sector has been facing severe cash and liquidity problems which have intensified due to poor export earnings, illicit financial flows, the so-called illegal hard currency exports and the general fear of the return of the buried Zimbabwean dollar.

Financial Matters with Shingai Moyo

In a dollarised economy, just like any other central bank in that situation, the Reserve Bank of Zimbabwe lost its key functionality of printing money and the sources of liquidity are therefore through exports, foreign investments and diaspora remittances.

However, due to poor macro-economic policies and perceived high political risk, the country has been failing to attract meaningful foreign investments.

It is estimated that in 2015, Zimbabwe managed to only attract US$250 million foreign investments compared to over US$1 billion for Mozambique. Given that, there is only one meaningful source of liquidity for the economy, which is export earnings.

Low global commodity prices have been cited as one of the main cause of the liquidity problems in Zimbabwe. However, there are other issues which have caused the current cash and liquidity situation.

In a dollarised economy where the central bank has no powers to print money, liquid cash comprises cash that is immediately available to the banks in either notes or coins or in their banks’ nostro accounts abroad.

Nostro accounts are local banks accounts with other banks abroad that they may use to withdraw cash or to make foreign payments on behalf of their clients.

The current liquidity and cash challenges can be partly traced as far back as March 2012 when the RBZ first introduced controls on banks’ nostro accounts. Before March 2012, banks had huge balances in their nostro accounts in excess of US$450 million which they were using to import cash and make foreign payments on behalf of their banking clients. However, in March 2012 when the RBZ introduced a 25% to 30% threshold on nostro balances, banks’ nostro balances plunged by 56% to below US$250 million.

This clearly shows that besides depressed commodity prices, some policy interventions by the central bank have been contributing immensely to the cash and liquidity crisis.

Prior to March 2012 when banks had control of their nostro accounts, liquid cash to deposits was in excess of 30%. The absolute level of liquid cash was around U$S650 million and reaching an all-time peak of around US$700 million in 2011.

However, due to more interventionist policies from the RBZ the absolute value of liquid cash has fallen to the current all-time low of around US$150 million. The ratio of liquid cash to deposit ratio has also been on a downward trend, falling from 45,2% in 2010 to current levels of less than 4%.

These trends highlight the impact of restrictions and controls on the economy. The current cash crisis, although attributed to the external shocks (depressed commodity prices), are to some extent caused by endogenous factors.

Clearly, the results of the gradual liquidity or cash tightening as a result of RBZ interventions are manifesting themselves now.

Although the restrictions were meant to encourage utilisation of idle offshore nostro balances, which was good, they failed to meet the intended objective. The measures resulted in banks generally transferring their offshore nostro balances to RBZ’s RTGS. As a result, commercial banks funds held at the RBZ (RTGS balances) increased from around US$25 million in January 2010 to around U$870 million in May 2016.

Restrictions and controls in an economy are sometimes good, but they should be mechanisms to track if there have achieved the intended objectives. If not, there is no harm in reversing the policies.

The country has experienced policy reversals before in quite a number of instances. For example, indigenisation laws were implemented and reversed several times due to their toxicity.

Self-introspection by the RBZ is highly recommended, especially at this time when there is so much uncertainty in terms of policy direction. With the coming of bond notes as an “export incentive”, as we are told, the RBZ must not be afraid to scrap them if needs be.

Moyo is an economic and financial consultant. He writes in his personal capacity.

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