Risks associated with the Zim financial sector at the moment

There is also the problem of a compromised new currency, which has been made vulnerable through introducing it too fast, beyond what market participants can comprehend.

SINCE this is a drought year, United States dollar (USD) bank balances in the local banking sector might trigger problems.

This is because there will be a stronger need for food imports, which may result in a flight of the remaining US dollars from the formal banking system, as the greenback are used for settling payments for food imports.

If commodity prices (mineral exports) do not perform exceptionally well, then the local banking sector's USD balances might turn out to be a Ponzi scheme (digital numbers, which the banks cannot serve with adequate USD cash withdrawal requests).

This would be, particularly true, if the current USD bank balances have gone below the last estimate of 60% USD cash for the total  deposits as of May 2023.

That means that there is a possibility that banks may fail to honour domestic requests for USD cash withdrawals or to successfully process foreign payments by their local clients.

So, payments destined for foreign service providers, such as Facebook (for advertising), other foreign debit card payments made by locals, etc, may at some point fail to be processed successfully.

There are also risks associated with the conflict in the Middle East, whereby Israel and Iran might drag the whole region, and beyond, into war. That might have an impact on the price of fuel (it might increase) and maize imports from overseas, which might also increase in price or become scarce as sea routes are managed to accommodate the challenges arising from war.

The aforementioned would imply a speedier depletion of local USD cash balances in Zimbabwe's formal banking sector.

The new local currency (ZiG) has also "ambushed" the people. It has been introduced as a lurking bandit, too quickly, without ample preparation.

The informal sector may not embrace it. That immediately means that its price on the informal market, which is the larger market (or the largest foreign exchange market, to be precise), will be devalued.

ZiG's price on the informal market will be discounted (cheap). In other words, the parallel market exchange rate will continue to be higher than the formal exchange rate.

The result will be the same as what happened with Zimbabwe dollar (ZWL), which is about to be decommissioned. Price disparities prevailed between formal and informal sectors,  with the formal market trailing the informal market exchange rate.

A perfect example of the formal market going forward is the "willing buyer willing seller", interbank foreign exchange market.

Considering that this is a drought year, the challenges may be more pronounced as the months go by. That is, as the effects of the drought possibly get worse, the challenges associated with the new monetary regime may become more apparent.

There is a possibility that the mentioned challenges may cause turbulence, as exchange rate pricing alignment might be a challenge in markets, such as domestic trading (which entails the everyday buying and selling of goods and services), the financial sector), etc.

So, the country has a silent but very present problem of a risky USD deposits sector (in the formal banking system), which has been triggered by issuing loans in USD, whilst the country neither prints the currency (US dollars) nor has a strong foreign exchange reserve position to support the expanded USD bank balances.

There is also the problem of a compromised new currency, which has been made vulnerable through introducing it too fast, beyond what market participants can comprehend.

What could have been done

The Reserve Bank of Zimbabwe (RBZ) could have taken the easy way out by controlling inflation associated with the ZWL first, and placing it below 10%.

That was the easy option. But even that option needed tweaks (adjustments), such as abandoning the formal foreign exchange market, completely, or designing a means to have it guided by the informal forex market (parallel market), which is the larger market.

Also, after fully floating the ZWL, the RBZ could have adopted inflation targeting, which would have resulted in the inflation rate succumbing to below 10%, possibly within 1-2 years, using personal estimates.

However, several trade-offs would have been necessary to speed up the progress of reducing ZWL inflation, such as suspending Intermediate Monetary Transfer Tax (IMTT), so that the bond notes (ZWL physical bills) do not trade at a premium to digital ZWL deposits.

That would have also restored a portion of the public's confidence in the banking system. The adjustments had to come first before realising victory over inflation.

Another unfortunate eventuality is that the currency also lacks physical appeal. It would not be surprising that someone overcharged and under-invested in its designing.

In other words, this might mean that a portion of the funds for designing the currency could have been lost to alleged corruption. That will also be another barrier blocking confidence in the ZiG.

A thorough commitment towards designing the bank notes would have inspired wider public acceptance.

Moreover, the currency comes with what appears to be complicated valuation mechanisms at this stage. It should not take a mathematical guru to understand the basic valuation of a currency against the US dollar, for instance.

A straightforward valuation method, which could be used by any average person would have added to the excitement surrounding the new currency.

Sadly, the country has rushed a sensitive process that should have taken a few months, which needed to be characterised by educating the public of the ZiG before its arrival, whilst the ZWL should have been strengthened by reducing the inflation rate associated with it.

I have come to realise that in Zimbabwe, you need to have a comprehensive understanding of the economy for you to find success as a leader at the Finance Ministry or the central bank.

That is because when you know in part, instead of comprehensively, you will need the services of another expert, to add to your knowledge.

The problem is that, most of the contributors who assist also have partial knowledge, or at least that is how it appears. They do not think in full cycles when it comes to economics, but they think in fractions.

And considering that each one comes with his half-baked or even unsound ideas, the final product turns out to be disastrous at times.

Moreover, going forward, the RBZ and all ministries in government may need to publish draft policy documents, firstly, before choosing actual policy options.

The draft policy documents should be made available on government websites, social media and other accessible platforms  so that stakeholders add their comments, providing insight into areas where the draft document has weaknesses or is not suitable for certain stakeholders.

Government officials can then make corrections or adjustments to their draft policy documents based on the stakeholder feedback. That would lead to a polished final policy document.

Also, since the stakeholders would have known about the policy proposal from its drafting stage, when implementation time comes, there would be very few questions about the policy in the market.

The citizens and other stakeholders will need to be given at least a month to comment on the draft policy documents.

In the end, a good banker is known by his ability to stick to his word. That is the same for a central bank, which is to be respected. That is also the same for a good leader.

The fact that the RBZ and the Ministry of Finance, Economic Development and Investment Promotion have gone in circles, changing positions regularly, around the local currency, especially since the introduction of bond notes does not do good to support the local Zimbabwean banking sector, and its indigenous currency.

Going forward, the success of ZiG and the Zimbabwean banking sector will also depend on the ability of the RBZ governor and local banks to keep their word and integrity.


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