ZIMBABWE’S chances of re-engaging with international donors are increasingly waning because of ballooning government expenditure, which has left the country highly dependent on domestic capital markets to finance shortfalls as banking system liquidity remains tight and weighs heavily on economic growth.
In the past year, the banking sector continued to shrink in real terms although there was a significant improvement in key metrics for most banks, pushed by the increase in property revaluations and exchange gains, the liquidity situation for a majority of banks remained constrained.
While Zimbabwe has remained heavily indebted on the multinational as well as the domestic fronts, Imara Capital Zimbabwe has said the government’s pivot from austerity to efforts of job creation and ramping up productivity in key sectors of the economy in line with NDS1(National Development Strategy), will fuel government consumption.
The central bank intends to continue pursuing the monetary targeting framework in order to control money supply.
The framework targets containing reserve money growth to levels of below 25% per quarter, which remains critical in bringing inflation to regional and internationally acceptable levels, while at the same time sustaining exchange rate and financial sector stability.
“The government’s pivot from austerity to efforts of job creation and ramping up productivity in key sectors of the economy in line with NDS1 will fuel government consumption to an extent, in our view. As financing is expected to remain an issue, supported by weak revenue growth in real terms given the anticipated poor economic expansion and the ongoing dislocation arising from the currency regime, we expect the printing press to run full throttle. Increased government expenditure will further reduce the likelihood of large-scale re-engagement with international donors and lenders, meaning that the government will remain highly dependent on domestic capital markets to finance the shortfall. Banking system liquidity will therefore remain tight, weighing on economic growth, in our opinion,” Imara said
Meanwhile, the increase in returns due to non-monetary gains poses multiple risks to ROEs (return on equity) in the short term while cost of equity remains high for the banking sector. Furthermore, the currency devaluation also created a mismatch between foreign denominated assets and liabilities on most banks’ balance sheets, further compounding the vulnerabilities.
“Lending rates remained mostly negative in real terms, and most banks have shifted to growing non-funded income, although the volume of transactions is coming under pressure due to liquidity constraints and the Covid-19 pandemic.
“Uncertainties are sizeable and will remain so for some time. We expect the country’ challenges to remain acute in the short-to-medium term. As highlighted earlier, risks of worse growth outcomes remain sizeable and will depend on the persistence of the Covid-19 shock and recovery efforts thereof,” Imara said.
Meanwhile in his monetary policy statement, central bank governor, John Mangudya said the development of a framework for the implementation of Basel III Liquidity Standards, covering the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) was successfully completed.
The LCR is designed to ensure short-term resilience of the liquidity risk profile of banks by ensuring they have high quality liquid assets to survive a significant stress scenario lasting for one month.
“The bank has commenced a consultative process with the banking sector as part of the steps to operationalise these standards by 31 December 2021. The NSFR seeks to promote resilience of banks over a longer time horizon by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing basis,” he said.