Zim still needs an IMF-backed economic programme

Brendrick Wamambo
The mid-term Monetary Policy Statement presented on Wednesday gives a good picture of recent economic developments. There is more disclosure on the stock of Treasury Bills, the worsening cash situation and the causes of currency shortages. It is also a sobering presentation in that it alludes to the fact that when all is said and done, Zimbabwe still needs an IMF-backed economic programme, which requires a cocktail of economic reforms especially on the fiscal side.

The Policy Statement, however, does not give details of the nature of the Reserve Bank of Zimbabwe loans to Government, the terms of the loans as well as the utilisation of these loans.

The banking sector statistics are also interesting and could be a great indicator of the confidence that the sector has on private sector. As anticipated by many, the Central Bank also tightened its grip on foreign currency collections by adding platinum and chrome to the list of exports whose proceeds are managed by RBZ.

Importantly, the RBZ has coined the term “local dollars”, in order to distinguish the bank balances we are holding locally from actual dollars. In my thinking “local dollars” are a new currency and therefore not USD notes, or USD held in foreign accounts.

Further the RBZ shares their research on the premium of actual US dollars over “local dollars” which they estimate to be 25 percent. The RBZ rightfully noted that money creation through credit has led to excess demand for foreign exchange. It also suggests that indiscipline has also led to lower supply of foreign exchange through leakages.

However, the policy statement attempts to generalise the sources of credit creation by including bank loans, despite the fact that bank credit grew by a paltry 1,9 percent. In fact, bank credit was way slower than the 6,7 percent growth in deposits, while credit to government which grew 38.7 percent was the only realistic driver of money creation. One can also argue that the excess demand for foreign exchange has led to leakages because of the attempt to hedge against inflation as money supply grows.

The US dollar has turned from a transactional currency, to more of a store of value, such that those with excess “local dollars” have turned to hard currency as the asset of choice. The banks are not lending, and it appears the RBZ likes it. The monetary authorities allude to the fact that growth in bank credit will exacerbate the US cash situation by feeding into excess demand for the hard currency.

More worryingly, bank credit growth could lead to higher inflation, because the average consumer would become more liquid. Luckily for the RBZ, banks are not lending. They are all too happy earning risk free interest in treasuries, or maximising on fee income which is also more stable and less risky.

This has seen the loans to deposit ration shrinking to 52,11 percent, from 63 percent in June 2016. This is also lower than the benchmark rate of 70 percent implying that banks are taking much lower risk than recommended by RBZ. The liquidity ratio at 66 percent is more than double the benchmark 30 percent, so banks are awash with liquidity — only that they cannot honour withdrawal requests.

We also note that non-performing loans (NPL) ratio has come down from 20,45 percent to 7,95 percent, thanks to ZAMCO. However, as an economy, are we not conveniently understating the overall NPLs? Have these loans already performed in the short period under ZAMCO? Segregating our bad loans does not mean that the loans have actually performed; it means we have shifted the burden from banks to ZAMCO.

But the loans still have to perform so that ZAMCO can collect and service the half a billion TBs issued in place of the bad loans. While the policy statement gives a detailed explanation on the sources of our economic problems, the policy measures are not too exciting. For example, the RBZ managed some 30 percent of total forex inflows, which may look a modest number.

However, the $887 million that RBZ managed is 50 percent of export proceeds, although it was 30 percent of total inflows. These exporters are effectively getting an exchange rate of 1,025 — 1,05 local dollars to foreign dollars (termed bond notes incentives).

Our prayer is that they remain content with this rate given that the RBZ knows some exporters are getting 25 percent more for foreign dollars. More should be done to keep exporters incentivised. The Portfolio Fund is likely going to be overwhelmed because of lack of investor confidence in the economy in general.

There are more foreign sellers than buyers, and the $5 million seed money will not go a long way. The $600 million nostro stabilisation facility sounds more like the RBZ is spending future foreign currency inflows in advance. Unless exports are going to increase sharply, the cycle will soon catch up.

While increasing bond notes was inevitable, it is worrying that the bond notes are still going to be drip-fed into the economy. This will not solve our cash problems, but will actually drive the bond notes to premium over electronic money.

Further the RBZ should consider leaving the Afreximbank facility for bond notes and move to “local notes” which would be more responsive to demand for cash.

If we have “local dollars” in our bank accounts, we might as well have “local notes” backing the bank balances. It is unimaginable that banks will continue issuing US dollar notes for a long period.

If the RBZ is going to continue monetising the Budget deficit, they may as well issue new currency.

Finally, the end game is an IMF sponsored economic recovery programme. Debt clearing alone, as the RBZ and the Treasury have publicly noted, is not sufficient.

The country still must commit to structural reforms that are endorsed by the IMF in order to transform the perceived country risk profile, improve UD dollar liquidity, and attract Foreign Direct Investment.

The ministry of Finance and the central bank are singing from the same hymn book when it comes to reforms and ease of doing business.

I am afraid, that despite the public statements, the opposite is actually happening. Government debt is shooting through the roof, fiscal deficit widening, while Government is growing faster than private sector. The chances of an IMF programme at this moment remain slim!

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