HomeOpinion & AnalysisFeature: Temporary ban, far-reaching consequences

Feature: Temporary ban, far-reaching consequences

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BY MTHANDAZO NYONI
IN a move that shocked the economy to the core, President Emmerson Mnangagwa early this month ordered banks to stop lending, to, ostensibly, halt the Zimbabwean dollar’s rapid devaluation on the black market.

Barely a week after the announcement, the central bank lifted the bank lending ban, but the damage was already done.

For instance, Zimbabwe’s biggest dairy products processor, Dairibord Holdings Limited suspended a planned dividend payout to shareholders to protect the business following the controversial lending directive.

Dairibord was due to pay out $187 million in dividend for the year ended December 31, 2021.

Dairibord chief executive Anthony Mandiwanza told our sister paper NewsDay that working capital had become crucial, adding that it did not make sense to pay a dividend at the expense of working capital requirements for the business.

The move inconvenienced shareholders because it denied them a chance to receive their dividend payout on time.

Again, sugar producer Tongaat Hulett announced suspension of advanced payments to millers working with the company following suspension of lending by banks.

This resulted in the price for a 2kg packet of sugar rising from US$1,90 to US$3,25, triggering panic buying by citizens. Sugar is currently scarce in the country.

Notably, the price of sugar remained high despite the government lifting the ban on bank lending.

Fivet, a livestock health and feedstock supplier, suspended sales, while Surrey, another agriculture processing company, asked farmers to stop supplying livestock to its abattoirs.

Hotelier Cresta Hospitality reacted by announcing that it was, with immediate effect “no longer in a position to offer credit terms for all Zimbabwe dollar business transactions.”

Zimbabwe Stock Exchange-listed companies were also affected as they sought to preserve cash in anticipation of an expected credit crunch.

Another major casualty of the measures was loss of confidence in the banking sector.

Zimbabwe’s financial services sector has in the past been hit by periods of hyperinflation and currency changes, with the burden of value loss absorbed by the banking public.

This has weakened confidence in the sector.

Financial sector policies should drive confidence in local banks if they are going to effectively play their financial intermediary role. Banks are fundamental to domestic savings mobilisation, and low confidence in the sector is undermining that role.

Measures not helping situation

It will take time for the banking sector to regain the lost confidence as a result of government’s inconsistency, which is needed to attract savings.

Savings critical for economy

The Zimbabwe banking sector is characterised by well capitalised banking institutions with average capital adequacy ratio of 30,04% above the regulatory limit of 12%, but still needs to recover lost public confidence.

Business groups had warned that the lending freeze would hurt commerce and worsen Zimbabwe’s economic crisis.

Economic research firm Morgan & Co said the lending freeze would hurt Zimbabwe’s already fragile economy.

In a research paper titled: Unpacking the currency and exchange rate dynamics in Zimbabwe and future outlook, Gift Mugano, an economics professor at several top regional universities including the University of Zimbabwe, said this was a serious policy misstep.

He said evidence from the Reserve Bank of Zimbabwe (RBZ) as of December 31, 2021 shows that 76% ($190 billion) of total loan advances were channeled towards the production sector, while 20% ($50 billion) of the total loans are consumptive.

“This clearly demonstrates that the loans being advanced by banks are not for speculative purposes since the lion share is going into the productive sector. Even though 20% of loans were consumptive it does not mean that 100% of it was used for speculative purposes since these funds naturally are used to meet households needs and critical expenditures such as procurement of goods and services,” he said.

“The abrupt cessation of loans and overdraft drawdowns means that the lifeline of businesses is cut which will lead to bankruptcy among firms (especially highly geared firms) and disruption of production. In the same vein, this measure will result in massive disruption of businesses and cashflow mismatches as banks pounce on incoming transfers with a view to recover their funds.”

Mugano said the anticipated insolvency and firm closure or reduced production was likely to cause serious shortages of commodities and spur imports from the region whose net effect will be drainage of the precious foreign currency.

“Banks traditionally receive 35-50% of income from lending and loan advances. This, therefore, means that the banking sector will be severely affected by this measure which may result in closure or failure to meet capital adequacy or closure and contagion effect across the banking sector, which, if not managed, will result in the overall collapse of the economy,” he said.

Mugano said: “This policy will fail dismally and based on the foregoing observation, the reversal of this policy is imminent.” And indeed, it has failed!

“In addition, even if the Government of Zimbabwe maintains this policy, the exchange rate spiral as well as inflation will continue unabated because the major driver of the exchange rate spiral in Zimbabwe is the wrong funding model for construction work and the agricultural sector as well as exogenous factors..,” he said.

The professor of economics said the new dispensation has pursued command agricultural and massive construction work which is funded by short term finance (cash).

For example, in the 2022 national budget, 34,5% of the total budget, that is $334 billion, was allocated towards construction work while 12% ($116 billion) of the budget was earmarked for the agricultural sector.

Combined, both the agricultural and construction sectors received $450 billion which will find itself in the black market when both contractors and actors in the agricultural value chains are paid because of the need to preserve value, he said.

“In addition, one of the major drivers of the exchange rate spiral is incessant demand from households and corporates buying foreign currency as a way of preserving value — demand for foreign currency by individuals and other economic agents has become one major source of demand for foreign currency in Zimbabwe,” he said. Mugano said the current Russia-Ukraine crisis would also make matters worse. For instance, sudden surge in fuel or energy (including gas) prices from US$1,30 per litre to US$1,71 per litre (diesel).

“This worsened the situation on inflation since any increase in the price of fuel has massive negative multiplier effects on the economy which, when combined, results in cost push inflation,” he said.

Because Russia controls about 70% of ammonia gas — a key raw material used in the production of fertilisers, Mugano said the cost of fertilisers have surged by 100%, that is from US$600 per tonne to US$1 200 per tonne. Ironically, the prices of chemicals used in agriculture are also expected to increase by 100%, he said.

“This will be imported inflation and will result in cost push inflation; and since the Government of Zimbabwe is maintaining command agriculture, it will be forced to do a supplementary budget with a view to meet addition import costs — the budget allocated to the agricultural sector will burst — more money to the black market,” he added.

In short, the policy measure aimed at stopping money supply has brought negative returns to the economy, especially to the banking sector.

The sector will struggle to regain the lost confidence, the biggest loser of government’s heavy handedness.

  •  This story was taken from the Weekly Digest, an Alpha Media Holdings digital publication

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