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Prudent policies, stronger regulatory measures necessary

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President Robert Mugabe may have wanted to party like a rockstar on his 88th birthday on February 21, but all he got was a giant crocodile with dozens of flaming candles.

Up to three weeks after the big day, post-birthday competitions and concerts with songs remixed in praise of the “Comrade Leader” were still being broadcast on television.

Extended celebrations and personalised songs are a nice touch for a vain and twisted propagandist, but behind Mugabe’s pop and champagne lies a horrible financial mess and a potentially catastrophic food shortage. A week before Mugabe’s big day, his cabinet officially declared a liquidity crisis in the banking sector.

Although Finance minister Tendai Biti insisted it’s a “temporary problem”, it isn’t.

When the government’s inability to pay its top-heavy $400m Christmas wage bill and a major bank’s illiquidity affects banking for months, it’s a long-term problem.

And when State-controlled and international newspaper headlines scream,
“2012 Budget off the Rails” and “(Zimbabwe) Revenue Crunch May Shut Government” because inflows for the first quarter fall below Budgetary targets, it suggests a hauntingly familiar disaster could be in the making.

Despite positive international Monetary Fund (IMF) growth projection — the First Family’s rockstar extravagance notwithstanding — banks and industry are in for a very rough year if under-capitalisation persists.

On June 3 2011, the Reserve Bank of Zimbabwe (RBZ) announced it had placed ReNaissance Merchant Bank under curatorship after filing for bankruptcy.

Evidently, Zimbabwe’s bankers have not learned the lessons of 2003-2004’s banking collapse — when, in just six months, 13 out of 25 financial institutions were placed under curatorship, liquidated or administered by RBZ under the Troubled Banks Fund.

The current liquidity crunch stokes public fear of 2003-2004 happening all over again.

On a rescue mission last month, Zimbabwe dipped into its IMF Special Drawing Rights General Allocation and withdrew $110m — $20m is expected to help the RBZ resume its function as lender of last resort.

The government has also ordered the repatriation of $71m from its offshore funds to help struggling banks and companies from defaulting.

From March 1, new limits on nostro account balances came into effect.

In the hope of easing liquidity problems, the government has directed local institutions to maintain in their nostro accounts a maximum of 25% of their balances offshore and bring the rest back into the country.

As part of its “raft of measures”, the government has also proposed the introduction of plastic money, or tradable paper, backed by statutory reserve.

Though tradable paper may temporarily solve circulation problems, the trouble with any sort of locally regulated alternative tender is a man called Gideon Gono, the RBZ governor.

The last time Zimbabwe experienced a similar monetary crisis, he authorised the printing of lots and lots of money backed by nothing. Naturally, inflation mutated into world-record hyper-inflation, peaking at 231 million% at its worst.

On several occasions Gono slashed zeros from the Zimbabwe dollar and printed higher monetary denominations, but all these efforts came to nought.

The best cure was to kill the dollar and find new money because the country couldn’t manage its own currency.

Tradable paper whose circulation is controlled by the central bank might then be seen as a restoration of the governor’s authority and influence.

Since the temporary death of the Zimbabwe dollar three years ago, the country officially recognises five foreign currencies.

The adoption of Western currencies as legal tender amusingly contradicts Mugabe’s famous anti-West, “Look East” stance. To remedy this and other fiscal woes, there’s serious talk of adopting the Chinese yuan as a sixth currency.

Zimbabwe’s imperfect monetary system has provided economic stability, but its ability to withstand the knocks is severely tested by the banks’ liquidity problems and a growing shortage of physical cash in circulation.

Bad banking practices and weak fiscal regulation threaten to reverse and destroy the gains of past years and if Zimbabwe’s banks are going to stand strong in 2012, the government needs to act quickly and firmly.

For starters, stricter regulation on how institutions use depositors’ funds is critical, as is resolving issues with the national inter-bank transfer system which jams up every time civil servant bonuses, delayed salaries and benefits pile up.

From the banks’ perspective, the RBZ needs to design more investment-friendly policies that attract foreign direct investment and to ensure large foreign reserves held by local banks outside, are willingly brought back as a sign of confidence in the economy and the banking system.

The same is true for at least $2bn circulating outside of the banking system on the black market or illegally taken outside the country. The 2003-2004 domino collapse of financial institutions shattered people’s trust in the banks, so the black market and the practice of taking money out of the country became more lucrative and safer alternatives to banking.

But these informal and sometimes illegal alternatives were some of the root causes of hyperinflation and 2003-2008’s periodic cash crises.

If the figure of unaccounted money grows to more than $3bn, the current total circulating in the banking system, liquidity will tank and banks will have chronic money shortages, prompting cash hoarders to resume buying and selling currencies at extortionist rates.

To avoid such a disaster, the RBZ and banks, urgently need to adopt more fiscally prudent policies and stronger regulatory measures to address current liquidity problems.

• Tendai Marima is an independent correspondent and researcher currently based in South Africa. This is an edited version of an article that was published by Al Jazeera.

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