The Sunday Mail
WHEN Government announced Dr John Mangudya as the new Reserve Bank of Zimbabwe (RBZ) Governor on July 12, they made sure they laced the statement with the revelation that he “is a Keynesian economist who believes in discretionary fiscal and monetary policies and in the rational expectations hypothesis.” It was quite a mouthful.
Taking after British economist John Maynard Keynes, who lived from June 5, 1883 to April 21, 1943, and whose ideas became influential in the post-World War II reconstruction of Europe and during the period of the Great Depression (from 1929 to the early 1940s), Keynesian economists generally believe that active Government policy — far from the laissez faire concept — can help effectively manage the economy.
In essence, this breed also believes in a mixed economy where the private sector is predominant, with Government intervention during recession.
It is therefore unsurprising that the July Monetary Policy Statement (MPS) drips of the Keynesian spirit, philosophy and thought: that freeing locked up capital in the financial market will have the aggregate result of availing ready cash for on-lending for the local financial markets.
The ruling market consensus last week was that through the latest statement, the RBZ made a valiant effort to strike at the heart of the economic challenges that are presently affecting the local financial markets. The interventions that were made tried to address tight liquidity conditions, non-performing loans and the attendant problems of company closures, unemployment and low production levels.
Analysts estimate that the latest interventions could in the interim unlock more than US$1 billion in cash for the local market, with US$700 million released from the absorption of toxic debts by the Zimbabwe Asset Management Company (ZAMCO), a special purpose vehicle that has been created to buy non-performing loans (NPLs) from bank balance sheets.
An additional US$200 million is expected to be freed from balances that were previously held in Nostro Accounts (bank accounts held in foreign countries by domestic banks), while more cash resources will be generated from the amnesty that has been extended to unauthorised cross-border investments, external loans and exporters with non-recoverable export proceeds.
Curing aberrations in banking
It is claimed that in one fell swoop, the recent MPS tried to address the aberrations of the local banking sector that have impacted on local production. In the current self-adjustment phase, it has since been realised that the high interest rates that are obtaining in banks and micro-finance institutions are unsustainable.
Most banks, after dollarisation in 2009, levied punitive interest rates of between 30 percent to 60 percent — probably the highest in the region — but with reduced margins for business that naturally resulted after the currency switch over, most companies failed to repay the borrowed loans that were mostly short term.
Since then, non-performing loans have been rising. Latest statistics indicate that NPLs rose from a reasonable rate of 1,6 percent of loans and advances in 2009 to the current 18,5 percent.
NPLs above 5 percent are generally considered to be poisonous.
As NPLs have been rising, banks’ appetite to lend has been dropping, but souring loans have been rising nonetheless. But the creation of ZAMCO will naturally clean bank balance sheets, making them attractive for either local or foreign investors.
Borrowers, the majority of whom were failing to repay loans and are living under the shadow of foreclosure, will also be relieved as they will have the opportunity to renegotiate their terms with ZAMCO — either restructuring or rolling over their loans. But the establishment of ZAMCO and its expected impact on releasing funds for the local market cannot be considered in isolation.
The imminent establishment of credit reference bureaux that will share potential borrowers credit histories will help minimise risk and hopefully force banks to lower their interest rates.
However, with the absence of long-term capital, which, in RBZ’s view, can only be mobilised through foreign direct investment (FDI), the availability of cheap funds for the productive sectors, especially those whose projects have a long-gestation period such as mining, will continue to struggle. But far-reaching interventions can only be made from the fiscal side, by Government.
Not only will big companies benefit from the new measures, efforts to bring the Small Enterprises Development Corporation (Sedco), which has a direct interface with small and medium enterprises (SMEs), and the Infrastructure Development Bank of Zimbabwe (IDBZ) under the surveillance of the RBZ, is expected to help enforce discipline and help the monetary authorities with their market operations.
Of late, there have been reports of alleged abuse of funds by Sedco.
Furthermore, the reclassification of banks into three tiers, depending on their size and ability, and apportioning different market operations, is largely believed to be a positive development that will likely result in efficiency gains for the sector.
Those on the upper end of the spectrum (Tier I), those that have the ability to raise more than US$100 million in capital by 2020, will be able to offer additional services such as mortgages and leases to the market apart from core banking activities, while those that are at the bottom of the spectrum (Tier III), whose capitalisation will be pegged at US$7,5 million by 2020, will act as deposit-taking microfinance institutions.
Deposit-taking micro-finance institutions have been quite helpful in stimulating economic activity among small-scale and medium enterprises in China, and are naturally expected to play this role as well on the local market.
By slashing the amount that can be kept in offshore Nostro Accounts from 30 percent to 5 percent, the RBZ expects to create a fresh stock of cash for the local market.
Recent statistics indicate that as at June 2014, total FCA balances, excluding domestic FCA balances held by banks, amounted to US$1,7 billion, with US$277 million being balances held in Nostro Accounts.
So, balances held in Nostro Accounts are 5,7 percent of the total bank deposits at US$4,8 billion.
But questions remain on whether the apex bank will be able to enforce the new requirements.
In 2012, the former Governor of the RBZ, Dr Gideon Gono, slashed the threshold that could be held in Nostro Accounts to 25 percent, but he met fierce resistance from some big banks.
On the overall, economists bet that in the interim, all the new measures will release some funds for the local market.
Dealing with extortionate pricing
The authorities seem to imply that the current deflationary environment, which is expected to stretch to the end of the year, is being bred by consumer resistance to extortionate prices, especially in an environment where people are gradually realising the strength of the United States dollar.
Prices of goods and services in Zimbabwe continue to be relatively higher than those in regional countries.
The Retailers’ Association of Zimbabwe (RAZ) claim that the shortage of change in the form of coins leaves retailers with no alternative but to round off prices.
As a result, monetary authorities have decided to import special coins of 1c, 5c, 10c and 20c whose value will be at par with the US cents.
Rand coins will also be imported.
This is expected to lessen the burden on the consumer and scrap any pretext that retailers might have to overcharge.
Opening the door to investment inflows
The grim reality from latest statistics is that Zimbabwe continues to be an unattractive investment destination.
In the first six months of the year, foreign investment inflows amounted to US$67 million compared to US$165 million in the same period a year ago.
In the 34-year period from 1980, foreign direct investment inflows were US$1,7 billion compared to Zambia and Mozambique which realised US$7,7 billion and US$15,8 billion in the same period.
As a result, the RBZ , within the limitations of the monetary policy, has opened up both the local bond market and the secondary to foreign investors.
Before, foreign investors were only allowed to subscribe up to 35 percent of primary issues of bonds and prohibited from making purchases on the secondary market.
Such restrictions have been scrapped altogether.
Also, where a 75 percent cap on participation on the ZSE was imposed on those in the Diaspora, the restrictions have similarly been scrapped.
In total, these reforms coupled with the demutualisation of the ZSE, the establishment of the Central Securities Depository (CSD) and the reduction of the settlement cycle is tipped to lure more investments on local markets.
Strong advice to
Government
Not only did the RBZ make bold interventions, it also proposed bold measures that fiscal authorities could take to help lift the economy.
SANCTIONS — It is the Bank’s view that the colletaral damage of sanctions that are imposed on Zimbabwe is severe since it is affecting foreign direct inflows into the country.
There has also been other “unintended” and “undesirable” consequences such as corruption and smuggling.
Naturally, the RBZ urged the US Government to continue to take steps to scrap the illegal sanctions.
The EU is understood to be presently taking steps to remove its embargo.
INDIGENISATION — Government has been urged to guide investors in a clear manner through gazetting sector-specific investment regulations and guidelines. This is expected to make the law wholesome and straightforward for investors.
LAND LEASES — RBZ believes there is need for Government to expedite the issuance of bankable and transferable 99-year leases to qualifying farmers.
INFRASTRUCTURE — The central bank urged Government to reduce the budget for recurrent expenditure so as to make space for capital projects.
IMPORTS — Government should consider taking action against unnecessary imports that have affected the country’s trade balance, including the Balance of Payments position.
