A confidence crisis is brewing over Zimbabwe’s banking sector mainly driven by the gradual lo ss of value of bank balances due to the growing mismatch in the United States dollar exchange rate amid growing pressure from employees for salary increases.
The shortage of the US dollar, the country’s major trading currency, has spawned significant exchange rate disparities with other forms of currencies, mainly the bond notes.
The yawning exchange rate disparities exist between US dollar cash against other forms of money such as Real Time Gross Settlement (RTGS), mobile money, and bank balances.
While the US dollar officially ranks at par with the bond notes, Zimbabwe’s surrogate currency (or its equivalent in bank or mobile balances) the exchange value has been discounted on black market.
As a result of the foreign currency shortages, both individuals and companies have been resorting to the parallel market to purchase foreign currency for foreign payments.
The loss of value of money in the bank accounts has driven individuals and corporates to seek safe havens for their money by investing in assets including equities or disposing of the bank balances at huge discounts to obtain US dollar cash.
There are also growing worries about the loss of value of bank balances in the face of rising inflation.
The major factors driving the upward trend in inflation include the shortage of foreign currency to import critical raw materials that has led to high premiums being charged on hard currency. The premiums are passed on to consumers through pricing, resulting in inflation.
The prevailing situation effectively means the real value of salaries has been reduced due to artificial inflation (currency premiums) or real inflation reflected in higher prices.
Economist Dr Gift Mugano told Business Weekly that the scenario discouraged banks savings.
“The current situation is discouraging people to put their money in the banks for the simple reason that the one holding cash is “king” at the moment,” said Dr Mugano. “This new environment comes against the background where people had little confidence in banking system because of what happened in the past (the 2008 economic crisis).
“The issue of a four tier pricing system; mobile, Ecocash, bond notes or coins and RTGS make it more difficult to preserve value. So, holding US$ cash is akin to holding gold, as long as we have four tier pricing, no economic agent, no matter how patriotic they may be, will put money in the banks, we need to remove the distortions.
“More so, people cannot access their cash from the banks and as long as people cannot access the cash they will not bank it. The money in the bank is also now discounted, people are getting poorer because they are now being charged prices, which are very high if paying using transfer, mobile money or bonds you pay a premium.”
Dr Mugano said there was need to build supply to make sure there is production in order to generate foreign currency and to reduce imports.
“Import substitution is key, and what (Industry) Minister (Mike) Bimha is doing on local content is key because it helps domesticate production; so import substitution and export and investment drive are very key.”
Another economist Trust Chikohora said the current erosion of value of deposits would dampen confidence of the public.
Be wary of inflation
According to the Parliamentary Budget Office, Zimbabwe’s inflation could reach double digits, the first time since 2009, by end of next year. “It is clearly evident that the country is headed for two-digit inflation by end of year 2018,” said the Parliamentary Budget Office in its 2017 second quarter performance review of the budget
“Although this is valuable in terms of reduction in the real value of domestic debt, it reduces the value of savings and bank balances in RTGS dollars thus bringing back old memories of hyperinflation.
“This will further strain all efforts to build public confidence in the banking system,” it added.
As the banking public struggles to contain the spiraling inflation resulting from the use of bank balances, most local institutions have put conditions for their international payment cards, requiring prior funding in US$ to transact outside the country.
Zimbabwe National Chamber of Commerce (ZNCC) chief executive Christopher Mugaga said the plummeting value of the bond notes and bank balances against hard currency deals a huge blow to banking sector confidence and needs to be addressed.
“Obviously this is a dent to confidence that we can’t argue about. It is a serious dent, but what I can say is that obviously, the loss of the value of the bond note or its failure to hold at par to the greenback (on the parallel market) naturally is evident of the deep-seated imbalances within Zimbabwe’s monetary sector or it could be testimony of the gap which is now existing between RTGS balances and nostro balances plus cash balances,” Mugaga said yesterday evening in a telephone interview.
“In other words we cannot necessarily say when you hold a bond note it loses its value because in the account it maintains its parity with the US dollar, but what is happening is that it is a reflection of the disequilibrium within the monetary sector,” he added.
Are people getting poorer?
Kipson Gundani, Buy Zimbabwe economist said despite huge bank balances, people were getting poorer.
It’s complicated,” said Gundani. “We have a high fiscal deficit and Government is overspending on what it does not have with Treasury Bills, borrowing from people to liquidate them.
“The country also relies on imports. Now people who import are vulnerable and forced to go to the illegal market to get foreign currency at a premium and they are now pushing that on consumers resulting in price increases. This will result in artificial inflation and people are becoming poorer even with huge bank balances,” he added.
Bond note, USD parity?
Economist Tapiwa Mashakada said: “People must use plastic money voluntarily and for their convenience without any compulsion. All bank balances are populated with fictitious money because no one has got access to their money.
“When bond notes were introduced I was quick to observe that the 1:1 parity with the USD was a fiction, which would lead to the black market. I argued that the USD would become foreign currency and not ordinarily available. Indeed that is what we are witnessing. If you do not bank USD you cannot make foreign payments. International debit cards are now usable provided an individual has a US dollar account,” he said.