By Dumisani Ndlela
Zimbabwean banks face insolvency due to a growing portfolio of Treasury bills (T-bills) and electronic funds transfers unsupported by cash reserves, the International Monetary Fund (IMF) has warned.
T-bills and real time gross settlement (RTGS)-based electronic payments have been used largely to finance an expansionary fiscal policy which critics blame for cash shortages that have wreaked havoc on the economy amid resurgent inflationary pressure.
Government’s domestic debt has reached almost 25 percent of gross domestic product (GDP), driven mainly by the issuance of T-bills and the use of an overdraft facility from the Reserve Bank of Zimbabwe (RBZ).
Explaining the gravity of the situation, the IMF said the RBZ’s overdraft facility had set in motion “the creation of money in the nominally dollarised economy” due to the absence of sufficient cash reserves.
It said government entities were spending “the borrowed funds by crediting bank accounts of the payment recipients (employees, suppliers, contractors) through the real time gross settlements (RTGS) electronic system.”
“These transactions increase deposits in the banking system, but without a concomitant increase in the quantity of US dollars available in cash or external (nostro) accounts.
“To finance the remainder of the deficit, the government issued T-bills, mainly acquired by commercial banks but also used as payment for services,” said the IMF in a comprehensive Article 1V report on Zimbabwe issued after an IMF board meeting last week.
The creation of money through electronic payment platforms had been buttressed by the introduction of bond notes to provide cash for small transactions.
Domestic debt, which stood at $442 million in 2013 when ZANU-PF won its current five-year term to end a fiscally prudent power-sharing government with the opposition, surged to $4 billion last year.
The IMF said the RBZ had limited capacity to honour its obligations for bank assets in the form of RTGS electronic balances and T-bills because of insufficient reserves, posing great danger to banks.
But the Bretton Woods institution noted that based on the official indicators, President Robert Mugabe’s government, for long blamed for economic mismanagement, was “less concerned about bank liquidity and solvency”.
“They argued that high deposits (due to the RBZ credit to the government and to the withdrawal limits) boost bank liquidity, and large holdings of T-bills raise bank profitability,” said the IMF in a report prepared by staff who visited the country specifically for the report.
The IMF argued that its own view was that the current expansionary fiscal policy and deteriorating confidence were major drivers of capital outflows and diminished interest in investing in Zimbabwe.
These factors, the IMF said, had “played a key role in the external position being weaker than implied by fundamentals”.
“While full dollarisation has been a mixed experience, no currency regime would have gone unscathed without the accompanying international reserves and supporting policies,” said the IMF.
The IMF said while foreign-owned banks’ appetite for T-bills was on the wane, they nonetheless held a large share of their assets in RTGS electronic balances.
“Domestically owned banks hold the bulk of T-bills, in some cases as part of their capital,” the IMF said.
It warned that upcoming reforms to bank regulations requiring the valuation of assets at market prices would create recapitalisation needs for several banks.
The IMF said T-bills were no longer risk-free and liquid as they were subject to varying degrees of discounting in the market. It said anecdotal evidence pointed to discounts of up to 45 percent, putting the solvency of many banks at risk.
“On average, the industry could lose up to 15 percent of its capital base (about 1 percent of GDP) for every 10 percent discounting of T-bills, with domestically-owned banks at higher risk. Additional losses could arise from the discounting of RTGS balances,” said the IMF.
It estimated that for every 10 percent discount in these balances, bank capital would decline by the equivalent of 0,9 percent of GDP, based on end-March numbers.
The IMF revealed that there were prospects of an issuance of NSSA bonds to finance the central government deficit, but warned that this raised “further concerns about the asset quality of the banks that acquire such bonds”.
“Changes in accounting rules requiring the valuation of assets to market could bring forward the realisation of these losses,” said the IMF.
The Fund said with the bulk of bank credit directed to government, banks’ balance sheets had weakened and they were no longer able to direct credit to the private sector on a commercial basis.
It advised that the ability of banks to intermediate effectively could only be restored once the fiscal position strengthened and confidence improved. The Financial Gazette