GOVERNMENT is facing a fiscal meltdown triggered by excessive borrowing that has crowded out private sector lending, while destabilising the banking sector at the same time, it has been established.
By Bernard Mpofu
Zimbabwe is currently facing a liquidity crunch and cash shortages caused by depleting nostro accounts as exports decline and the over-issuance of Treasury Bills (TBs) to finance government spending.
This comes as the International Monetary Fund (IMF) in its latest report on Zimbabawe has warned that the economy is currently in a tailspin due to a plethora of structural issues. Foreign currency shortages have seen many firms unable to finance their imports due to the liquidity shortages, and the pipeline of imports awaiting payment is increasing by the day.
Imara Asset Management chief executive John Legat has also raised the red flag over the current holdings of TBs, which he said could destabilise the fragile banking sector.
Official statistics show that, at current levels, TBs held by commercial banks are now 1,7 times the level of bank equity capital, up from 1,3 times at the end of 2016.
“In our view this ratio should be setting off alarm bells in the banks’ boardrooms, but clearly it is not. Looking at various bank balance sheets at end May, CBZ would be most exposed with a ratio of over four times equity followed by ZB at two times. Looking at it from the commercial banking sector’s perspective, though, their total deposits have risen by US$330 million to US$5,2 billion during the first quarter,” said Legat in a research note titled The Great Illusion.
“Loans to the private sector are lower than a year ago, reflecting managements’ lack of interest in lending to the private sector where non-performing loans have been a problem for them. The private sector has been largely crowded out by government. So banks have channelled their rising deposits back into TBs. They have all but curtailed the ability of depositors to withdraw their money in the form of cash, hence the long queues that now exist outside the banks.”
Given next year’s general elections, it seems highly unlikely that the government will meet a budget deficit for the full year of just US$400 million, Legat said.
“Indeed we would expect to see a similar or higher number to 2016 which ended up at US$1,4 billion. Such a deficit can only really be funded by further issuances of TBs to the public, to the commercial banks, or by increasing loans from the Reserve Bank,” he said
“What the government owes the Reserve Bank could end the year at nearly US$3,6 billion, but borrowing from the Reserve Bank directly boosts the money base which is ultimately inflationary. The reality is that commercial banks have already been forced to default on their depositors by refusing cash withdrawals, and bank transfers are inflating away at anything up to 18-20% a year in real terms.”
According to an IMF report, following the completion of Article IV Consultation with Zimbabwe, excessive government borrowing could worsen banking sector confidence, thus boosting financial sector vulnerabilities and market segmentation.
“The banking sector, once affected by the hyperinflation episode, is now being pressured by the elevated fiscal financing needs, which are crowding out private sector credit and raising operational risks of banks and corporates.
Notwithstanding the strength shown by core financial soundness indicators, the system faces weaknesses posed by an increase in RTGS electronic balances and T-bill holdings in the asset part of the balance sheets at the expense of loans to the economy,” the IMF said.
“Domestically-owned banks hold an increasing part of their assets in the form of T-bills, while foreign-owned banks hold a higher share in RTGS electronic balances.
The increasing mismatch between these balances and the RBZ’s available foreign exchange to meet them render the bulk of these obligations inaccessible and illiquid. Additionally, the aggregated indicators mask the banking system’s segmentation, with heightened risk for a few domestically-owned banks.”
TBs, the IMF further said, are no longer risk-free and liquid as they are subject to varying degrees of discounting in the market.
“On average, the industry could lose up to 15% of its capital base (about 1% of GDP) for every 10% discounting of TBs, with domestically-owned banks at higher risk. Additional losses could arise from the discounting of RTGS balances. These delays are affecting the capacity of firms to produce and export, thus worsening the liquidity crisis. Private sector credit as a share of GDP is contracting as well.” the IMF said.