Financial meltdown looms

Financial meltdown looms
Published: 12 July 2016
ZIMBABWE'S economy is edging towards the precipice amid growing fears of a looming financial crisis as banks currency holdings continue to dwindle and cash shortages worsens.

Financial executives and experts say the cash shortages have seriously eroded confidence in the banking sector and could see sustained withdrawals from the formal banking system. A systematic run on banks have left financial institutions' vaults virtually empty.

The country's s banking sector has been experiencing acute cash shortages for almost two months. Snaking queues outside banks have now become the order of the day in the capital and other cities.

A look at key banking sector fundamentals show that there has been a massive deterioration, directly contributing to the current cash squeeze.

Reserve Bank of Zimbabwe (RBZ) figures for April 2016 show a marked 66% drop in cash holdings – notes and coins – in banks' vaults.

Total cash in bank vaults in the country was only US$135,5 million, a far cry from the peak cash holdings of almost US$400 million in December 2012.

The central bank's orders to reduce both cash holdings and cap nostro balance thresholds have also contributed to the progressive deterioration of bank positions.

Furthermore, increased government and RBZ borrowing activities mean banks are stuck with Treasury Bills, further crowding out credit to business or productive lending.

Central bank figures show that treasury bill holdings and balances held with the RBZ by commercial banks have increased substantially in the last 24 months,while lending to the private sector has slowed down.

Between January 2015 and April 2016, total commercial bank credit to private sector entities declined by US$140 million from US$2,797 billion in January 2015 to US$2,653 billion as at 30 April 2016.

Bank holdings of trade bills, which also represent commercial lending, dropped from US$164 million to US$19 million in the same period, also projecting reduced appetite by banks for commercial lending.

However, Treasury Bills taken up by banks shot up from US$326 million to a massive US$1,2 billion during the same period, fuelling fears that government's borrowing is dominating credit activities in the banking sector.

Bank executives say given government's borrowings are largely unproductive or for consumption, this means further challenges for the economy as the productive lending capacity of banks declines.

Bank balances held with foreign banks (nostros) have also been severely depleted from a peak of US$$489 million in February 2012 to a paltry US$133 million in April 2016.

This, bankers say, explains why banks have been failing to import sufficient cash and fund import payments on time.

The country's banking sector is recovering from bad loans, which had soared above 20% when the central bank introduced Zimbabwe Asset Management Company (Zamco), a special purpose vehicle to assume liabilities. Non-performing loans are a drag on the economy.

There has been a marked increase in the average period taken by banks to meet client requests for international funds transfers with payments now taking as much as a month.

Just this week, Stanbic Bank, a local unit of Standard Bank Group of South Africa, cut daily withdrawal limits from US$200 to US$100, an indication the bank is also grappling with cash shortages.

Other banks had earlier set daily limits of US$100, a paltry amount in a cash economy like Zimbabwe.

The use of visa cards outside the country has been stopped as monetary authorities battle to limit liquidity outflows. Billions have been funnelled out of the economy through an unsustainable import bill, smuggling and money laundering.

In an interview with Radio France, Finance minister Patrick Chinamasa said government "literally didn't have money." His admission of bankruptcy shows a financial meltdown is looming.

This week, Zimbabweans embarked on a job stay-away in protest over government's mismanagement of the economy.

Chinamasa's admission comes amid reports government has also resorted to raiding cash-rich parastatals for money to finance urgent and pressing needs of the state.

Institutions such as the Zimbabwe National Roads Administration (Zinara) and the Post and Telecommunications Regulatory Authority of Zimbabwe (Potraz) are now at the mercy of the broke government.

The Zimbabwe Independent last week reported government had authorised the Postal Telecommunications Regulatory Authority of Zimbabwe (Potraz) to release to buy vehicles for Information Communications Technology (ICT) minister Supa Mandiwanzira and his deputy Win Mlambo.

Zimbabwe is plagued by an unsustainable trade or current account deficit, poor balance-of-payment position as well as massive revenue leakages.

The country is now a net importer due to a wave of company closures and a dramatic fall in production. This has resulted in banks being unable to import cash to meet their clients' demands and properly perform their financial intermediation role.

This situation, charecterised by a trade deficit, huge balance-of-payments gap and widening current account deficit, prompted the RBZ to increase the percentage amount that banks could keep in their nostro accounts from 5% to 10% of total deposits.

With exports at US$2,5 billion in 2015 against imports of US$6 billion, Zimbabwe requires far-reaching measures to contain the import bill and improve the liquidity situation paralysing the economy.

Weakening commodity prices on the international market compounded with lower-than-projected tobacco deliveries against the backdrop of an El Nino-induced drought have reduced export earnings. This in turn has resulted in the depletion of nostro accounts of banking institutions.

In February, the RBZ said US$1,8 billion was externalised in 2015 with US$1,2 billion being siphoned out by corporates with outward individual remittances accounting for the balance. This has left the country reeling from liquidity and cash shortages.

- the independent

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