Following is Reserve Bank of Zimbabwe, Gideon Gono’s address to the annual congress of the Confederation of Zimbabwe Industries (CZI) in Nyanga on how to address the liquidity challenges which have continued to undermine economic recovery since dollarisation in 2009.
IT is an undisputable fact that the banking sector plays a pivotal and indispensable role in economic growth through efficient allocation of resources via financial intermediation. The intermediary role of banks can, however, be effectively played in an environment epitomized by liquidity adequacy. Additionally, improved market confidence and the smooth operation of the payment systems, largely depend on adequate liquidity in the economy.
As such, lack of liquidity in the banking system seriously undermines the stability of the financial system and results in loss of market confidence.
It is against this background that liquidity is regarded as the life blood of the economy, and in its absence financial markets cease to function efficiently. Persistent liquidity constraints in the Zimbabwean economy have resulted in reduced public confidence in the banking sector as well as increased financial disintermediation.
The adoption of the multiple currency system in January 2009 has been accompanied by persistent liquidity shortages. In this regard, attendant challenges in the banking sector are to a large extent inextricably bound to attendant liquidity conditions.
This adverse development has had debilitating effects on Government’s initiatives to firmly steer the Zimbabwean economy onto a recovery path. This reflects the negative effects repeated disruptions to the traditional mechanisms of liquidity creation and transmission, both at the aggregate and individual levels.
The negative impact of the prevailing liquidity challenges have also been felt on the inter-bank market, a key component of the money market and the starting point of the monetary transmission mechanism.
Regrettably, the potency of policy initiatives geared at enhancing access to finance has been severely undermined by liquidity constraints that have remained an albatross around economic recovery efforts. Lack of balance of payments and budgetary support as well as limited access to offshore lines of credit have also compounded the liquidity conditions.
The remedial measures to suspend disbursements to Zimbabwe on account of external payment arrears have conspired with subdued export performance and a rising import bill to amplify liquidity shortages in the economy.
To the extent that liquidity is a multi-faceted concept, the following viewpoints shape its definition:
- The liquidity of financial instruments – the ease with which financial instruments can be exchanged for money without losing value;
- Market liquidity – the ability to trade volumes without significantly affecting prices, (or the ease with which value can be realized from liquidation of non-cash assets without disturbing underlying prices);
- Monetary liquidity – the quantity of fully liquid assets circulating in the economy as measured by the narrow or broad monetary aggregates or its ratio to Gross Domestic Product (GDP);
- Funding Liquidity – the ease with which economic agents can obtain external finance. Alternatively the ability meet cash obligations when they fall due;
- Balance Sheet Liquidity – the amount of liquid assets on balance sheets of non-financial institutions; and
- Bank Liquidity – the ability of a bank to meet its immediate obligations as they fall due.In a nutshell, liquidity is the general level of liquid assets funding a certain level of economic activity.
If an economy has potential to grow at a targeted level, but there is insufficient liquidity to support the required production and other socio-economic activities, then economic growth is curtailed. Liquidity is therefore, critical in supporting the attainment of sustained economic growth and development.
Sources of Liquidity
It is important to note that, within the auspices of a multiple currency regime, where the Reserve Bank does not issue currency, liquidity sources are limited. In this respect, the country’s liquidity situation is contingent upon developments on the external sector front.
Other than domestic deposit mobilization, which, to a large extent, is currently limited, the major source of liquidity is export earnings, the others being:
- Diaspora Remittances;
- Offshore credit lines;
- Foreign direct investment inflows; and
- Portfolio investment inflows.
Efforts to improve the country’s liquidity conditions should, thus place great prominence on increasing confidence in the banking sector and the economy at large.Improved confidence is usually accompanied by increased investment inflows which in turn support key productive and export sectors.
This will in turn, improve liquidity conditions particularly under the multiple currency system. Zimbabwe requires adequate liquidity for both short term and long term funding for infrastructure and the productive sectors of the economy, and in particular our industries
Over the past decade, Zimbabwe’s products significantly lost competitiveness in the domestic, regional and international markets. This negative development is largely attributed to relatively high production costs as a result of various factors. In addition to high utility tariffs, production processes in Zimbabwe are hamstrung by erratic supplies of water and electricity.
This ultimately translates into high production costs, resulting in delivery delays for both domestic and export orders and the competitiveness of the products in general.Some producers are forced to utilize generators to power their plants and other operations.
As a consequence, production costs incurred ends up more than trebling when compared to costs otherwise incurred when power supplies are reliable. Zimbabwe’s competitors notably, South Africa also produce Genetically Modified (GMO) products which are cheap to produce compared to Zimbabwean products.
Some of these products find their way into the Zimbabwean market, thereby, out-competing domestically produced goods.In addition, there are regulatory and policy inconsistencies, by Government regarding the competitiveness of Zimbabwean products. For instance Government allows for the importation of products, notably GMO products such as onions, tomatoes, milk, yoghurt and other milk products.
The increased importation of these products has drained the Zimbabwean economy of the much needed liquidity. South Africa, for example, produces GMO products and has reliable power supply, resulting in the products being cheaper than rival products produced domestically. Mr. Chairman, a lot has to be done to eliminate these policy contradictions which are hampering the recovery of industry.
Under the General Import and Export License, all finished products can be imported including tomatoes, onions, apples, oranges, and milk products (the list is endless). As a result, in 2011 Zimbabwe imported finished products to the tune of US$5,419.2 million compared to US$1,308.7 million. in 1999.
This has resulted in the crowding-out of Zimbabwean products with dampening effects on efforts to rejuvenate the country’s industrial production.
It is against this background that significant de-industrialization has been experienced with the manufacturing sector’s contribution to GDP contracting significantly from 25% in the 1990s to current levels of 15%. At the moment, our retail shops are filled with finished goods imported from South Africa and beyond. These are goods which we used to produce in yesteryears and export to the region and other parts of the world.
Today our goods are not competitive in the regional and in international markets. Additionally, the need for reliable power supply remains key in efforts aimed at improving the competiveness of Zimbabwean products. Against this background, Authorities have to seriously and urgently consider the development of new power generation capacity.
For years, discussions on Hwange 7 and 8 extensions, the Batoka gorge, the Kariba South extension, the Gokwe North (Sengwa) power generation plants have become theme songs.
Up to this day there has not been any tangible progress in the development of these pipe dreams. For industry to develop and increase export capacity, the economic enablers have to be functional, these include, power generation, the rail and road networks and other utilities.
The efficient delivery of these enablers will allow industry to increase production cheaply, increase exports and in turn increase liquidity in the economy.The banking sector lies at the centre of all these activities through its intermediary role of mobilizing surplus investible funds for re-deployment to deficit individuals and entities.
In view of the recurrence of deep-seated liquidity challenges in our economy, the need for bold policy measures cannot be over-emphasized.At the national level, the Reserve Bank has put forward a number of short-term actions to rebuild confidence in the creditworthiness and robustness of financial institutions.
This is geared at facilitating the smooth operation of the market in terms of liquidity flow and provision of credit. The ability of banks to effectively promote economic growth hinges largely on bank soundness, efficiency and the stability of the financial sector.
As such, the Reserve Bank continues to play a proactive role to safeguard the banking sector. The bank mainly focuses on increased risk management procedures, enforcement of minimum capital adequacy, enhancement of corporate governance structures and the promotion of investment and growth.
The legal provisions governing the regulation and supervision of these institutions are set out in section 6 of the RBZ Act [Chapter 22:10], Banking Act [Chapter 24: 20], and National Payments Systems Act [Chapter 24:23].In addition, the Exchange Control Act [Chapter 22:05], empowers the Reserve Bank to regulate foreign exchange transactions in order to prevent financial instabilities arising from adverse mobility of foreign capital.
Bank capital plays a critical role of enhancing the competitiveness of banking institutions and reducing or mitigating incidences of bank failure and financial sector instability. To this end, the Reserve Bank continues to review the minimum capital requirements to ensure that banks are adequately capitalised.
A well capitalised and sound banking institution is able to attract significant deposits and offshore financing at a reasonable cost, which translate into lower cost of funds to the productive sector. As part of its efforts to ensure that banks are adequately capitalised, the Reserve Bank has opened up the financial sector to foreign players in a bid to create strong and competitive banking institutions, thereby improving the efficiency of financial intermediation.
Consistent with this, some banks have made concerted efforts to partner with foreign banks to enhance their competiveness. To date, Premier bank has partnered with Ecobank and Kingdom Financial Holdings Limited (KFHL) concluded an agreement with Afrasia Bank Limited (ABL) domiciled in Mauritius. The Central Bank continues to encourage the mergers of financial institutions in order to build strong banks that can effectively play their intermediary role in the economy.
This ensures that bank balance sheets will be strong enough to maintain the required liquidity ratios thus enhancing confidence in the industry.Experiences in Zimbabwe demonstrate the need for effective corporate governance within the financial institutions as most bank failures are due to weaknesses in corporate governance.
Proposed amendments to the Banking Act seek to improve the legal and regulatory environment in the country, as well as tackle specific issues currently being faced by banks such as abusing depositors’ funds through insider lending.
A substantial amount of cash is changing hands outside the banking system and this has exacerbated the liquidity challenges being experienced in the formal banking sector. The cash based transactions are mainly due to the growing informalisation of the economy. If such transactions are done through the banking system, financial intermediation would rise, thereby enhancing the ability of banks to extend credit to deficit units
.Efforts are being made by the banking sector to ensure financial inclusion of a large proportion of an unbanked population in the country through mobile banking.As at 31 January 2012, fifteen (15) banking institutions had introduced mobile banking products in partnership with mobile network operators. Financial inclusion is critical for economic growth and development, poverty alleviation and the attainment of the Millennium Development Goals (MGDs).
At the beginning of the year, the Central Bank directed banks to bring onshore Nostro account balances as part of measures to improve the liquidity situation in the economy and restore confidence in the banking sector. This measure contributed significantly in improving liquidity in the market. The challenge, however, is to ensure that the productive sectors of the economy have access to funds held locally.
On 1 March 2012, outstanding statutory reserve balances of banks amounting to US$83.4 million were converted into Government Stock of interest rates ranging between 2.5% and 3.5%; and tenure of 2, 3 and 4 years. The effective date for the stocks was 1 January 2012 and they pay half-yearly coupon.
The first coupon payment of US$1.268 million was effected on 2 July 2012. In that respect, we are grateful to the Government for ensuring performance as this promotes market confidence. This development will ensure support for any future issues of Government instruments.
In addition, banks may be prepared to start using these instruments as collateral or start trading them thus re-activating the interbank market. Money MarketThe absence of money market instruments, in the form of Government paper, has affected the smooth functioning of the inter-bank market, as banks and market participants cannot trade without suitable and acceptable collateral instruments, to cover counterparty risks.
Mr. Chairman, we commend the Honourable Minister of Finance for his Mid – Term Fiscal Review Statement in which he announced that Government shall issue instruments to the market. The re-introduction of these instruments will resuscitate the country’s money market and unlock as well as broaden liquidity, away from its current narrow definition of cash.
This coupled with the re-activation of the interbank market is envisaged to go a long way in ameliorating the current liquidity challenges thereby fostering banking sector stability and economic growth.
The issuance of these securities will also smoothen Government cashflows through the issuance of paper when Government revenues are low and the maturity of the paper coincides with the times when revenues are higher.
The multicurrency regime has undermined the ability of the Reserve Bank to perform its traditional Lender-of-Last Resort (LOLR) function, a development which has compounded the short term liquidity constraints. Once the LOLR facility has been increased substantially from the current $7 million, the availability of collateral will result in the operation of the LOLR – thereby increasing confidence in the banking sector.
Effective 31 March 2012, all banking institutions are now required to submit to the Reserve Bank, liquidity stress tests on a quarterly basis in line with Basel II requirements.
Stress tests results show the resilience of the banking sector to movements in market interest rates.Interest RatesLending rates quoted by banks have remained relatively high, largely sustained by persistent liquidity shortages, high credit demand, high associated risks, limited lines of credit and the absence of an active money market.
The absence of a functioning money market has resulted in the widening of interest rate range quoted by banks. Nominal lending rates quoted by banks range from 8% to 30% with a weighted average lending rate of between 14% and 20% during the last 4 months. Deposit rates, however, ranged from 0.15% to 6%, with time deposits offering higher rates of about 12%.
This negative development continues to militate against efforts geared at promoting a savings culture among the banking public. In turn, this compounds the country’s liquidity situation, which also hamstrings the economic recovery process.
Once an active money market is restored, it is envisaged that the rates will be aligned to an appropriate yield curve that promotes investment. In this regard, Monetary Authorities are currently engaged in discussion with the banking sector so that the industry addresses the issue of punitive bank charges and the high spread between lending and deposit rates.
The streamlining of charges has the potential to encourage the flow of savings into the formal banking system. To the banks, we encourage them to lower bank charges so as to enhance bank deposits. The banks can benefit from increased volumes of business.
The Central Bank has observed the unethical and unscrupulous behavior by money lending and micro finance institutions. In response to this, the Reserve Bank of Zimbabwe issued out a circular on 4 June 2012, warning the institutions to comply with regulations governing the conduct of their business.
The Central Bank noted that some of these institutions were illegally taking deposits from the public and this constituted a leakage from the formal banking system. The public is also being warned against investing their funds with these institutions as they risk losing their savings.
The Reserve bank has so far closed two institutions for operating outside the law and is monitoring the activities of microfinance and money lending institutions. These corrective measures, coupled with the lowering of bank charges and levies have the potential to attract deposits into the formal banking system.
Continued efforts by the Monetary Authorities to restore sanity in the banking sector are envisaged to further boost confidence in the industry.External DebtZimbabwe remains in debt distress, with a total public debt of over US$10 billion.
The continued indebtedness of the country is undermining the country’s ability to attract long term finance from traditional offshore creditors.In this regard, the resolution of the country’s debt will unlock credit lines and significantly improve the country’s creditworthiness, thus complementing current efforts to attract capital flows into the key export and productive sectors.
Within this context, the adoption by the Government of Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy (ZAADDS) in March 2012, is a bold stride in the amicable resolution of the country’s overhang. Authorities are currently engaged in discussions with the International Monetary Fund (IMF) staff monitored program and the issue will be presented to the IMF Executive Board in November 2012 for consideration.
The adoption of an SMP will pave way for possible arrears and debt clearance as well as provide a signal to other lenders to engage Zimbabwe and unlock funding for the country. This will undoubtedly, result in increased capital inflows and improve liquidity conditions in the economy.
There is increasing global acknowledgement of the critical role that deposit insurance systems play in the promotion and maintenance of financial stability, which is a critical component for economic growth, financial stability and economic inclusion.An informed public that understands the benefits and limitations of deposit insurance schemes behaves rationally in the event of a bank failure.
There will be no run on banks as depositors are aware that they will be reimbursed their deposits hence contributing to the stability of the financial system. In view of this, the Deposit Protection Board (DPB) was established in July 2003 with a mandate to reimburse depositors in the event of a bank failure. The institution, however, commenced its operations in the midst of an economic crisis and has, therefore, not been able to fully play its role.
There are, however, plans to recapitalize the DPB to enable it to give some protection to depositors and be able to reimburse depositors quickly, preferably within a short period as this builds confidence in the system.
The increase in non-performing loans has made it necessary for banks to be more prudent in their lending practices. This ensures that the sector remains stable even though lending is curtailed.
The repayment of loans by business is critical in giving the banking sector confidence and trust to enable the industry to continue providing support.In this regard, management of companies have to re-look at their business models and come up with strategies that build capacity to repay borrowed funds.
Consideration should also be given to other options such as diluting shareholding so as to bring in capital as a way of managing the liquidity challenges. Some businesses are collapsing just because owners still want to maintain full ownership and yet they are failing to mobilize funds from the banking sector.
Confidence is central in the growth and development matrix of an economy. Once confidence is assured, there is an incentive for people to work harder and become innovative even in an environment that is typified by negative exogenous factors.
Without confidence in an economy, financial capital will always fly out to safety, thereby undermining liquidity conditions. Mr. Chairman, we need confidence liquidity in this country in order to oil the wheels of the economy and support sustained growth.
Sense of Urgency
Certain laws and regulations need to be reviewed so as not to derail the growth momentum that the country has attained. In this regard, there is need to ensure that the country is served with pro-actively designed laws and regulations which enable productive sectors to operate in a conducive environment.
Currently, both the Authorities and the private sector have to act with a sense of urgency in order to accelerate the economic recovery process which is key in improving liquidity conditions. For instance, Authorities need to urgently review the prohibition of the transportation of certain products, notably fuel by road after 6pm.
Surely, there is no harm in allowing tankers to move fuel at night. IndigenisationThe implementation of Indigenization and Economic Empowerment regulations in the banking sector should be done in a manner that preserves confidence since any adverse developments in the banking sector could grind economic activity to a screeching halt.In this regard, we commend Government’s initiatives to re-engage in view of the Indigenization and Economic Empowerment regulations as espoused in the July 2012 Mid- Term Fiscal Policy Review.
As such, we are gratified to note that some aspects of the Indigenization and Economic Empowerment Regulations are receiving attention with a view to harmonize and fine- tune pertinent issues.
Within this context, the need to reconcile the Indigenization regulations and other Acts of Parliament cannot be over-emphasized. Accordingly, the implementation of the Indigenization and Economic Empowerment provisions cannot be done in isolation of the Banking Act and Regulations, the Reserve Bank of Zimbabwe Act, the Exchange Control Act and Regulations, the Companies Act and all other already existing legal instruments.
Maintenance of banking safety and soundness is essential, given the key role played by banks in facilitating economic growth. Accordingly, the current reforms in the banking sector, which place more emphasis on the need for banks to be adequately capitalised, through mergers and acquisitions will be sustained and strengthened.
A sound banking sector is critical in mobilizing funds for the growth and development of the productive sectors of the economy, creating employment and the overall benefit of the generality of the population.
Under the multi-currency system, the major source of liquidity are exports receipts. As a result, there is need for medium to long term capital to replace antiquated equipment and machinery in industry so as to produce competitive products for both export and domestic consumption.
This should see the level of import growth dissipating and exports rising. The improvement of confidence in the economy is critical in order to raise the required capital both locally and offshore.
This will support the recovery of productive sectors, create employment, improve export earnings and liquidity available for on-lending to the rest the economy for the benefit of the whole economy.