By Alois Vinga
THE Reserve Bank of Zimbabwe (RBZ)’s decision to recall some $1.2 billion in local currency balances held as excess liquidity by financial institution could help in suppressing parallel market rates, experts have said.
Last week the Central Bank directed all financial institutions to transfer to the RBZ the local currency balances they are holding as counterpart funds for the foreign currency historical or legacy debt which government assumed at the rate of 1:1 between the local currency and the US$.
These amounts had accumulated over a three-year period from around 2017 owing to hard currency challenges hence they could not be remitted.
On introducing the local currency and a partial float exchange rate in February, the Central Bank promised to settle all foreign dues incurred during dollarisation at 1:1
Economist Persistence Gwanyanya in an interview with NewZimbabwe.com Business said the move will have a sterilising effect rates and might improve the availability of hard currencies on the inter-bank market.
“The RBZ has already started the exercise by instructing banks to transfer $1.2 billion to it in respect of the legacy debts that it is assuming. Usable balances are around $1.2 billion and the move will result in massive reduction of the Zim dollar liquidity,” he said.
Another economist, Prosper Chitambara said that the directive will reduce the demand for the US$ but predicted that the reduction in demand could be in the short term.
“Owing to the fact that other key economic fundamentals like agriculture, corruption, industrial productivity and confidence issues, the benefits may be short lived. Liquidity is also likely to increase depending on the percentage by which civil servants salary increments will be effected,” he said
Chitambara said that such increases in liquidity are likely to push up exchange rates and warned that if government is tempted to print more money, such trends may see the perceived gains diminishing.
Equity Axis’s chief financial analyst, Respect Gwenzi said that policy measures will have an immediate impact of lowering the quantum of local currency balances in the banking system and the amount of deposits will thus diminish grossly thereby strengthening the Zimbabwe dollar.
“Despite the RBZ promise of 1:1, these deposits were competing for foreign currency on the interbank and some investors were willing to take a shave. The exact amount of transferable deposits is however not known in the market,” he said.
Gwenzi said that Treasury and the RBZ have previously said the amount is below $2 billion.
He observed that on the downside, it is evident that sterilisation will result in additional debt for the country and worse still in foreign currency. The debt to GDP ratio will thus go above 100%, which means the capacity to service to debt will be significantly low.
“Given the high leverage, the ability to attract lines of credit will equally be low. This is the second time government assumed private sector debt in under 10 years. Payable interest on the due amounts will further burden the fiscus and if fundamentals do not improve at a quicker rate, may result in further fiscal misalignment,” Gwenzi added.
