Analysis: RBZ Monetary Statement

Yesterday the Reserve Bank Governor issued a severely critical assessment of the state of the Zimbabwe economy, citing among the causes the conditions that affected the country while it was still using its own currency:

Mid Term MPS July 2012

1. Frequent power outages;

2. Cash shortages;

3. Acute foreign currency shortages;

4. Skills flight;

5. Vibrant parallel market for goods and foreign exchange;

6. Erratic fuel supplies;

7. Endemic speculative and rent seeking behaviour; and

8. Rapid rise in production costs.

After “significant strides” that could be taken after the country adopted the use of foreign currencies, the Governor observes that new challenges have emerged, some of which are similar to those that affected the economy up to the end of 2008:

i. Policy reversals and inconsistencies;

ii. Indiscipline in the financial sector;

iii. Deterioration of infrastructure.

iv. Adverse global economic developments;

v. Difficult external sector position;

vi. Persistently recurrent liquidity challenges;

vii. The negative effect of sanctions;

viii. Widespread closure of companies; and

ix. Limited fiscal space.

What is missing from the Governor’s analysis is that most of the problems have a common origin: the massive cuts in output that followed upon Land Reform and the forced closure of nearly four and a half thousand agricultural companies. As a direct consequence of those closures, many other companies have also gone out of business. The impacts of these all get a mention – lost jobs, lost export revenues, lost tax revenues, lost skills and the country’s inability to settle its debts – but the links back to the cause do not.

Neither is there any mention of the fact that the collateral value of farmland and the the active market in these properties permitted the banks to extend long-term credit as well as loans of working capital to commercial farmers. A large part of the explanation for Zimbabwe’s economic collapse is the cancellation of the market value of the securities that supported the largest volume of credit available to the economy.

However, the Governor does make a sharp reference to one of the effects: in 2011 Zimbabwe had to import $5,4 billion-worth of finished products, but in 1999 it had to import goods worth only $1,3 billion.

Many pages of the 65-page report deal with the problems of the banking sector and he believes some of these have been made worse by the demands of the Indigenisation and Empowerment Act. Hopefully, his critical observations on this Act will be taken seriously. He also blames sanctions, saying that they are “impeding access to commercial and trade finance, as both Government and private sector’s access to foreign loans is curtailed.” Perhaps a mention of sanctions is obligatory in any government statement, but, more accurately, the Governor says a few paragraphs later that access to external borrowing is not an option “on account of accumulated external payment arrears.”

On practical issues, the Governor’s wish to see a smaller number of better-capitalised banks emerging is made clear by the announcement of a significant increase in minimum capital requirements. Commercial and merchant banks will have two years to meet a new minimum of $100 million and building societies’ capital will have to reach $80 million in that time. These figures are eight times the currently acceptable minima.

The timetable requires that they reach 25% of the target by December 31 this year, 50% of the target by June 30 next year, 75% by the end of next year and 100% by June 30 2014.

Some of the banks might be expected to have difficulty doubling their capital by the end of this year, it is those that might be expected to start arranging mergers first. It seems inevitable that others will be drawn into the merger / take-over debate as the deadline approaches, but others will be hoping that indigenisation threats will be removed and that equity capital injections from abroad will be brought within reach.

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