ZIMBABWE is again enduring a liquidity crisis, this time of the mighty US dollar. In an attempt to deal with the crisis, regulatory authorities introduced, then rescinded a cash withdrawal limit policy and forced banks to repatriate 75 percent of their funds held in offshore accounts.
The cabinet is believed to have discussed the crisis last Tuesday and is set to recommend a raft of measures. Fingers have again been pointed at the besieged banking sector, pretty much the path of least resistance and a tired excuse for everything wrong with the economy. However, few of the new policies appear to address the core of the problem.
The bank’s Nostro (foreign) accounts seems to be a lesser problem than ‘Under-the-mattress’ banking where a significantly portion of economic activity is outside the official monetary system in an increasingly informalised transactory environment. Nonetheless, a liquidity crisis is not always about externalisation.
A patch work policy approach targeting withdrawal limits and Nostro accounts seems like putting a Band-Aid on a terminal haemorrhage where nothing short of a full monetary policy overhaul will suffice. A fuller assessment of the liquidity problems suggests fragility of macroeconomic fundaments in the absence of the stabilising effect of strong monetary policies.
A complex cocktail of various economic factors may have made a liquidity crisis inevitable. Since dollarisation, monetary authorities have had no capacity to determine the ‘Currency in Circulation’ (M1) which is essential in measuring liquidity and money supply. As a consequence, the central bank with no real monetary authority has no means to determine the amount of dollars, pounds, rands or pulas in circulation.
Zimbabwe has a history of significant informal transactions outside the banking sector. According to a recent AfDB report, the informal sector accounts for approximately 65 percent of all business transactions in the country. The only current measure of monetary aggregate is bank deposits and saving ratios with last December records suggesting bank deposits of approximately US$3 billion.
About the same amount could be under the mattress, largely because of an overload of policy statements which seems to suggest to the public that Zimbabwean banks are either on the brink or fundamentally unsafe. Liquidity is largely about confidence. A sudden loss of confidence, whether rational or irrational will result in liquidity difficulties.
Another significant problem is the central bank’s loss of lender of last resort function. With loan to deposit ratios above 70 percent, a prevalence of short term deposits and very little of long term savings, liquidity ratios are inevitably stretched. Without the lender of last resort function, it seems implausible to suggest that banks would have a high risk of ‘moral hazard’ with liquidity management. The risk of banks undertaking imprudent liquidity risk management and holding lower levels of liquidity due to the expectation that the central bank will support in the event of a market wide stress should be nonexistent especially when banks expect no such help.
Addressing the problem
The banking sector has been in a policy whirlwind since dollarisation. The regulatory authorities have not been very helpful in restoring public confidence since the 2003 financial sector crisis. In most developing countries such as Zimbabwe, the banking sector is significant for many reasons; they dominate the financial system and contribute significantly to economic growth. Banks are also the most important source of finance for the majority of firms due to underdeveloped capital markets. Addressing the liquidity crisis will require strengthening the banking sector and creating conditions that induces long term deposits into the system.
Monetary authorities should consider policies which addresses punitive bank charges and the high spread between lending and deposit rates estimated at 20 percent compared to about 5 percent in the region as long term solutions. The payment system should encourage the use of alternative payment solutions and increase the capacities of the RTGS system.
New liquidity policies will require banks to place less reliance on short-term wholesale funding particularly from foreign sources and the restoration of the RBZ’s lender of last resort function. There will also be need for a higher amount and quality of stocks of liquid assets, which may include a greater proportion of assets held in the form of government debt.
Dr Lance Mambondiani is an Investment Executive at Coronation Financial. He is also a Teaching Assistant in International Finance for Development and Financial Markets and Corporate Governance at the University of Manchester. He can be contacted on firstname.lastname@example.org. The view expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial