The theme of the monetary policy statement (MPS) which Reserve Bank governor Gono delivered on January 31 is Ensuring Financial Sector Stability.
Why is financial sector stability so important? The banking sector plays a critical role in the realisation of the development aspirations of any country, thats why. What follows are my insights on some of the MPS salient points.
My question in respect of these points is: what hard choices must be made in order to reach the mecca of financial sector stability?
Unsustainable current account deficit: The significant 30,2% increase in merchandise exports wasnt enough to offset the 23,3% increase in imports, given our reliance on imports for most of what we need.
Essentially, this means we are exporting jobs to the likes of South Africa and China. And it makes us a chronic net debtor. The big question is: Does everything we import justify an unsustainable current account deficit of $1,89 billion?
How much of it is accounted for by trinkets? With statistics such as these, increasing industrial capacity utilisation and enhancing the value of our exports through beneficiation are just but two of the hard choices we must make, in addition to punishing those who import trinkets even at the price of a dollar for God knows how many.
Loan-to-deposit ratio: A loan-to-deposit ratio of 71,7% was recorded during the review period. This rises to 87% if offshore lines of credit are included.
The relatively narrow differential of 15,3% reflects the limited role external credit is playing in funding economic growth due to the impact of an unfavourable country risk profile. The imperative is to diversify the funding sources and by default, the attendant costs.
Composition of private sector credit: When you scratch the surface of the composition of private sector credit, you uncover the ills that plague the local credit markets illiquidity, inherent credit default risk and the short-term nature of available financing.
The fact that only 6,2% of credit went towards mortgages in a country with a significant housing deficit illustrates the unwillingness in fact the inability of lenders to meet the needs of mortgage financing which typically requires long-term financing.
The relatively low level of Bankers Acceptances at 5,8% reflects the level of risk attributed to local corporate borrowers and is perhaps reflective of the absence of a viable market in which to trade such instruments. Because of default risks, banks tend to focus on plain vanilla lending products, as reflected by the 83% for loans and advances.
Sectoral distribution of credit: Notably, lending to agriculture at 16% is higher than the 10% required by the African Unions Maputo Declaration, lower than the 30% threshold which the Reserve Bank of Zimbabwe (RBZ) has previously encouraged banks to aim for.
Interestingly loans and advances to individuals (largely for consumption) at 15% compete unhealthily with the real sector, illustrating the consumerist ethos seizing the nation.
What hard choices will be made to exorcise that spirit in order to ensure long-term sustainability and stability of the financial markets?
Money market: The absence of a viable money market is fingered for contributing to the widening of interest differentials. Lending rates were noted to be in the range of 8-32% with most banks reportedly quoting 20% against time deposit rates of 0,15%-17%.
With metrics such as these, it is no wonder default risk is rising and harnessing domestic savings for development remains a pie in the sky. What hard choices must the regulator and the players make to revive the money market and grow domestic savings?
Recapitalisation: The recapitalisation roadmap announced by the RBZ for undercapitalised banks unexpectedly revoked previous dispensations. That can be a reflection of two things.
Either the concerned banks have not exhibited adequate seriousness (not for lack of trying, I hope) in their approach to recapitalisation or the governor has suddenly decided to design the end-game himself, instead of waiting for matters to take their own course.
Either way, it looks like some hard choices have already been made and by April Fools Day, the banking sector could already have been altered maybe not beyond recognition but certainly in a significant way.
International financial centre: Even though an international financial centre in Zimbabwe would not necessarily have a better risk profile than the countrys risk, this is an initiative I support wholeheartedly because of its potential to deepen financial markets, promote foreign direct investment and enhance market liquidity.
The hard choice to selectively relinquish some of our controlling instincts and to ask no questions might be rewarded.
Liquidity management: The localisation of offshore accounts for mining houses, restriction of Nostro balances that local banks may maintain and the limits on high-value cash withdrawals are typical hard choices that have been made in an effort to improve liquidity and its management.
There is, however, a fine line between regulatory effectiveness and overregulation and FSS hopes these measures will achieve their intended purpose without constraining business activity.
Agricultural mechanisation: Without taking anything away from the mechanisation programme, I respectfully suggest that before efforts must be made to complete the programme as per RBZ recommendations, effort should perhaps be focused on getting those that benefitted under the first phase to pay for what they received.
The resultant cashflow can be channelled into a revolving fund that can be used to finance completion of the programme.
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Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity.