ZIMBABWE is facing cash and foreign exchange shortages resulting in many depositors sleeping outside banking halls with the hope of accessing the little cash that is available at banks. Reserve Bank of Zimbabwe governor John Mangudya (JM, pictured) introduced some measures to boost foreign currency inflows, but the situation has not yet changed. Zimbabwe Independent projects editor Bernard Mpofu (BM) speaks to Mangudya on this and other monetary policy issues.
BM: How stable is the banking sector given the growing holdings of Treasury Bills (TBs) which critics say could cause vulnerabilities?
JM: The banking sector remains safe, sound and stable. The key financial sector soundness indicators, including stress tests, results show that the sector is resilient to shocks, notwithstanding the challenging macro-economic environment.
As at June 30 2017, all banking institutions were adequately capitalised with ample capital buffers to cushion banks from unrealised losses. The banking institutions continue to build capital buffers in order to achieve compliance with the 2020 minimum capital requirements and to effectively support the productive needs of the economy.
The critics are confusing the shortages of foreign exchange within the economy with financial vulnerabilities. Local banks are quite liquid with real-time gross settlement (RTGS) system monetary balances which constitute part of narrow money (M1) balances. These balances are, however not matched or backed on a one to one basis by the amount of foreign exchange in the economy as not all RTGS monetary balances are required for foreign payments. It is this mismatch that causes the premiums of between 5%-20% in the informal market which critics ascribed to financial sector vulnerability.
About 89,75% of the current TB holdings were issued to monetise the Reserve Bank and government legacy debts accrued from the pre-multi-currency era as well as capitalisation of financial institutions where government has interest and for the acquisition of non-performing loans from banks by ZAMCO bills.
Only 10,25% of the TBs in the market relate to government financing. These TBs are purchased by financial institutions on a willing buyer willing seller basis. Government has religiously been honouring all the TB maturities on time to the satisfaction of investors.
BM: What are the current holdings of the TBs?
JM: As at July 14 2017, outstanding TBs issued were broken down as follows: RBZ debt 22,08%; government financing 10,25%, capitalisation 8,39%, Zimbabwe Asset Management Company 15,24%, government debt 44,05%.
Out of these outstanding TBs, commercial banks hold 40%, corporates (19%); RBZ (18%); pensions and insurance companies (8%); while the rest is shared by asset management companies, government agencies, building societies and other investors.
BM: Banks have reduced their lending to the private sector, a development that could affect productive sectors. What is the central bank doing about this?
JM: Lending by banks to the private sector has remained constant at US$3,6 billion between December 2016 and May 2017. Banks are not necessarily expected or required to lend within the context where households and firms’ balance sheets are liquid due to the trickle-down effect of an expansionary fiscal policy. Increasing bank loans under these circumstances will put undue demand pressures on the limited foreign exchange resources which will exacerbate premiums in the informal market.
As part of the developmental response thrust and in line with the financial inclusion agenda, the Reserve Bank has come up with a number of funding initiatives to revitalise the productive sectors of the economy. These include the Women Empowerment Fund (US$15 million), Youth Empowerment Fund (US$5 million), Horticulture Facility (US$10 million), Business Linkages Facility (US$10 million), Gold Support Facility (US$40 million), Export Finance Facility (US$50 million) and the Cross-Border Facility (US$15 million).
BM: We understand that the RBZ is now in talks with Afreximbank to extend its export incentive facility. Can you elaborate on this?
JM: The RBZ is engaging Afreximbank and other friendly financial institutions to come up with facilities in an amount of US$500 million that will mitigate the cyclical export earnings capacity of the domestic economy in order to stabilise the nNostro position especially after the end of the tobacco selling season in August.
Regarding the export incentive facility, engagements are at an advanced stage for the enhancement of the facility to support the export incentive scheme. This scheme is essential to promote the export of good and services under the context of lack of export competitiveness.
An export incentive scheme of 5% basically means that Zimbabwean’s exports will be lower in foreign markets by five percentage points — a form of internal devaluation to restore competitiveness. The export incentive is monetised by bond notes which have a secondary or upside effect of providing money in circulation.
As per our commitment, all bond notes issued by the bank will be backed or secured by a foreign currency facility to ensure convertibility and that the bond notes will continue to be released into the market on a drip-feed basis to guard against moral hazards and inflation.
BM: Have bond notes boosted exports? In fact when you introduced bond notes you said by the time that facility runs out, our exports would have reached US$6 billion? Has this been achieved?
JM: Yes, indeed. The export incentive scheme has had an incremental impact on the volume and value of the country’s exports, judging by the year on year comparison of export shipments and global foreign currency receipts. In particular, the country’s global foreign currency receipts have increased, with various companies now exporting into the region due to the increased export competitiveness arising from the export incentive scheme.
The opening up of such export markets is key for export growth and development and ultimately, increased foreign exchange generation which is a critical element for sustaining the dollarisation/multi-currency system. Inculcating an export culture under dollarisation is not an option.
Global foreign currency receipts were around US$5,1 billion at the end of June 2017 with corresponding export incentive of US$175 million. The projected target of around US$6 billion therefore remains achievable by the time the US$200 million export incentive scheme is exhausted.
BM: How far has Zimbabwe gone in clearing its arrears with the World Bank and African Development Bank?
JM: We have made significant progress towards clearance of the arrears to the World Bank and the African Development Bank.
The country has met the necessary conditions for the repayment of debt arrears to the World Bank and African Development Bank. Repayment will be triggered after we have started to make traction on the requisite structural reforms critical for debt sustainability. The ball is in our court.
BM: What are the timelines?
JM: Timelines are dependent on our movement to implement the structural reforms for debt sustainability.
BM: The International Monetary Fund recently warned government against using gold reserves to clear arrears. Is this sustainable given current production figures?
JM: On an annual basis the country earns about US$1 billion from gold exports. The Bank has already put in place support measures earmarked to boost gold production to ensure gold export sustainability. Leveraging on our mineral resources to unlock new financial resources and reduce Zimbabwe’s country risk premium is critical for the betterment of all Zimbabweans.
I do not normally want to comment or react to issues raised by other bodies or people without knowing the context in which the concerns were discussed, suffice to say that we are not very sure if the IMF has a better solution or alternative approach for Zimbabwe’s special financial condition given that the IMF is the world’s financial crisis management institution which can provide emergency financial support to its members in good standing, of which Zimbabwe is one.
BM: What is your forecast on Zimbabwe’s interest rate regime?
JM: Interest rates for productive lending are projected to remain within the current range of between 6 to 12% per annum.