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Financial sector spotlight: Linking fiscal and monetary policies

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Fiscal policy plays a pivotal role in shaping the operating environment for the financial sector.

By default, monetary policy implements aspects of fiscal provisions, so it is a no-brainer that the two must be in sync with each other if financial sector development is to take place.

Following presentation of the Mid-Term Fiscal Policy Review (FPR) by Finance minister Tendai Biti on July 26 2011, we look at some of its key imperatives for the financial sector in relation to the Reserve Bank of Zimbabwe’s Monetary Policy Statement (MPS).

Bank capitalisation: Against the background of heightened public anxiety, the FPR sets out to calm frayed nerves by affirming the soundness of the banking sector while duly acknowledging resurgent challenges facing the sector.

It refrains from passing further judgement and defers to the Reserve Bank for strategies to address financial sector vulnerabilities.

Accordingly, the Reserve Bank confirms that as at June 30 2011, six banks were undercapitalised resulting in three of them being granted extensions on the basis of on-going recapitalisation initiatives.

Banks without realistic recapitalisation plans are told in no uncertain terms to surrender their licences and wind up business in line with the troubled and insolvent bank resolution policy signifying that regulator’s patience is wearing thin.

The growth story: Both the fiscal and monetary policy statements acknowledge the growth momentum in the banking sector as manifested by a 23% increase in deposits from $2,36 billion to $2,90 billion between January and June 2011.

Increase in loans and advances over the same period to $2,35 billion translating to a loan deposit ratio of 81% against international standards of 70-90% also illustrates this growth story.

The volatility and short-term nature of deposits accounting for over 90% of total deposits is however acknowledged as a serious drag on growth manifesting itself in the mismatch between available financing and the medium to long-term financing requirements of the real sector.

Risk matrix: Apart from recapitalisation woes, other key risk factors tempering the growth momentum include the anaemic contribution of interest income to total income, itself attributable to sub-optimal drawdown of approved finance facilities given high lending rates of between 15% and 40%.

Ominously, high interest rates are also fingered as the major cause for the incidence of non-performing loans averaging 37%.

The reform agenda: By far the most outstanding feature of both the FPR and the MPS — as far as the financial sector is concerned — is their reform-mindedness.

Firstly, concerned by the high level of interest rates and their impact on broad development objectives, the government acknowledges the need for market forces to prevail, but makes it known that “it nevertheless expects financial institutions to play their role in building the economy while also observing ethics and good corporate governance.”

In support of this position, the Reserve Bank enters moral suasion mode and proposes a framework under which lending rates are linked to inflation, the cost of funds and the borrowers’ risk profile.

Banks are urged “to act as responsible citizens and play their part towards reinforcing efforts to achieve sustainable economic growth.” The long march towards sustainable banking has begun in earnest, it would seem.

Recently FSS highlighted the Finance minister’s concerns about the fragmentation of financial services regulations and his proposal to consolidate the regulatory regime in order to eliminate regulatory arbitrage.

In pursuit of this objective the FPR signals the government’s intention to consider the creation of a Financial Services Authority/Board (FSA/FSB) with the sole responsibility of regulating the financial sector.

The MPS on the other hand marks the beginning of an era of more collaborative approach to financial sector supervision marked by enhanced cooperation and coordination following the signing of a memorandum of understanding by the Reserve Bank of Zimbabwe, the Insurance and Pension Commission, the Deposit Protection Board and the Securities Commission of Zimbabwe.

The setting up of the higher level trilateral Financial Sector Development Council comprising the of Finance minister, the governor of the Reserve Bank of Zimbabwe and all regulators, is a notable development with immense consensus building capabilities.

When fully functional, such a body could effectively promote dialogue and reduce real/perceived differences while laying the groundwork for the creation of the FSA/FSB.

The unsustainable level of financial disintermediation attributable in the first instance to hyperinflation and subsequently to dollarisation has unquestionable anti-growth characteristics manifested in low levels of domestic savings and limited deposit mobilisation.

The consumer survey to assess the level of financial inclusion, spearheaded by Zimstat in collaboration with Finmark Trust, is therefore a welcome development since it will culminate in the national financial inclusion policy which could legislate for banks’ intermediation role to be restored in a substantial way.

The outlook period also envisages reviews of the Securities Act, the Insurance Act as well as the Pensions and Provident Act.

The government will also seek to expedite work on the Micro-finance Bill and the Deposit Protection Corporation Bill.

Promulgation of amended exchange control regulations in line with the multicurrency regime and liberalised current account is also anticipated.

In closing, it is worth noting that financial sector reforms are critically important because they form part of the conditions set by creditors for full re-engagement in respect of the clearance of national debt.

Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd writing in his personal capacity.

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