By Paul Nyakazeya
The depletion of banks’ nostros accounts has created serious settlement problems for international payments, resulting in most banks having a backlog for telegraphic transfers (TTs) going back as far as April this year, the Financial Gazette’s Companies & Markets (C&M) can disclose.
The problems are part of an intensifying cash crisis in the country, which has resulted in depositors failing to withdraw their money from banks.
Sources within both the banking sector and industry said banks now had long queues of people wanting to make foreign payments. Even those placed on the top of a priority list put in place by the Reserve Bank of Zimbabwe (RBZ) were failing to get funding for their foreign payments, they said.
The RBZ had indicated that the priority list was meant “to promote efficiency utilisation of foreign exchange and to re-orient import demand towards productive uses”.
It indicated that the measures had been agreed with the Business Council, which it said was represented by the Confederation of Zimbabwe Industries (CZI), the Zimbabwe National Chamber of Commerce (ZNCC) and the Bankers Association of Zimbabwe (BAZ).
That list, called the foreign exchange priority list, was to guide banks in the distribution of foreign currency towards competing demands.
Ironically, the situation got worse after the RBZ announced plans for the introduction of bond notes in May, which it said were meant to inject liquidity into the economy and ameliorate a cash crisis.
The announcement triggered panic withdrawals and worsened cash shortages.
Payments via TTs are supposed to be processed within 48 hours but are taking too long to process.
Importers, especially retailers, are fretting over delays in processing TT’s to cross border suppliers, seriously affecting their ability to restock. Although there is a trend towards promotion of local products, Zimbabwe still depends on imports due to the fact that local industries have collapsed or are operating at very low capacity.
The situation has equally affected the mining, manufacturing and construction industries.
Parents and guardians paying school fees for children overseas were also being affected by the delays, which have resulted in children at foreign universities owing learning institutions.
Some banks are advising their customers to wait at least a month after initiating a TT for it to go through, while other banks are instructing their customers that they cannot determine the time payments would be made to intended beneficiaries.
Nostro account refers to an account that a bank holds in a foreign country with another bank. Nostro, a term derived from the Latin word “ours,” are frequently used to facilitate foreign exchange and trade transactions.
TTs are an electronic money transfer from a local bank to a bank account outside the country.
They are the fastest mode of money transfer in a normal economy.
The settlement gridlock was creating challenges for most companies importing raw materials.
CZI president, Busisa Moyo, said depletion of nostro accounts had negatively affected their members’operations as TTs were taking longer to be processed.
“Companies have money is their accounts but cannot use it to import raw materials or to bring a new machine to increase production, capacity utilisation and profit,” said Moyo.
Moyo indicated that diminishing nostro account balances held by banks were frustrating industry’s ability to transact internationally and many businesses had failed to pay for imports.
“All our nostro accounts put together have been between US$200 million and US$400 million against total deposits of US$5,9 billion. Foreign payment and the nostro account balance problem was a bigger threat to the economy than bond notes,” he said.
Bond notes amounting to US$75 million are expected by the end of the year.
The RBZ governor, he said, had indicated that a maximum US$200 million worth of bond notes would be printed.
BAZ president, Charity Jinya, said a number of factors had culminated in the current foreign currency liquidity shortages.
She said these challenges had largely emanated from a continuing trade deficit, noting that any issuance of Treasury Bills (TBs) would “continue to put pressure on the country’s ability to effect transfers outside the country”.
She said collective efforts were being made by various stakeholders to mitigate these challenges.
These measures included restriction of unnecessary imports applied by banks based on a priority list; a directive by the RBZ to reduce cash export thresholds for travellers; and the planned introduction of bond notes by the central bank, which she said was aimed at stimulating exports.
“Banks are also encouraging the use of electronic and digital payment platforms for all transactions and streamlining cash withdrawals to reduce pressure on their Nostro accounts. A combination of these measures, if supported by the market should improve nostro liquidity and reduce import payment cycle,” Jinya said.
Economist and former president of the ZNCC, Trust Chikohora, said the delay was grinding businesses to a halt.
“It is difficult to move money from our banks; the situation is worse for retailers failing to get products outside the country to improve their performance and earnings. We are having a situation where one has money in their account but cannot access or transact it faster electronically,” he said.
Retailers said urgent steps were needed to ensure that international payments, particularly food imports and related raw materials, were executed without unnecessary delays as this was harming relationships between importers and foreign suppliers.
Confederation of Zimbabwe Retailers (CZR) president, Denford Mutashu, told C&M that the delays in the processing of TTs required urgent attention by monetary authorities.
“There is need to check compliance by the banks on whether the import priority list is being adhered to. The retail sector has not been spared by the challenge. Expedition of payment is critical in ensuring consistent supply of goods and service in the retail sector,” said Mutashu.
He said manufacturers were complaining that the slow pace of foreign payments was hindering production resulting in supply gaps.
“Nostro accounts have to be funded and there is need to ensure transparency in the allocation of the available cash and reduce the time it is taking to process them,” he said.
The RBZ directed banks to localise a significant proportion of their nostro balances by transferring them to the Real Time Gross Settlement System (RTGS) account held with the central bank some time ago, resulting in the erosion of balances in nostro accounts.
Banks are now holding very small amounts of offshore receipts because of this “surrender requirement”.
Once the RBZ adopted this measure, it gradually started using some of the money for its own use, resulting in banks experiencing delays in getting their money back from the central bank when they needed it.
When banks needed to fund its nostro accounts, they requested funds from the RBZ and these were taking too long to be made.
The RBZ started issuing TBs to banks to cover this gap.
As a result, bank’s TB holdings went up.
“So in short, nostro liquidity was transformed into TBs which are not very liquid and are only backed by RTGS money. At the same time RTGS balances were seemingly no longer backed by real dollars in RBZs offshore accounts. That is where the problem is and this is the source of cash shortages as well,” a banker told C&M this week, indicating the proposed bond notes would worsen the situation.
RTGS are also taking long to be processed at a time RBZ is advocating greater use of plastic money, with the intention of ensuring that 80 percent of monetary transactions are done using card or electronic transfers in the next five years.
Economist, Brains Muchemwa, said prudent fiscal management, restoration of investor confidence and rational policy making should become the cornerstone to addressing the settlement challenges and ensuring that the economy grows and that nostro accounts are replenished at a rate relatively faster than they are being depleted.
“If this current trend continues, the carnage that has been happening on banks’ balance sheets would worsen,” Muchemwa said.
Increased bank holdings of TBs coincided with the slowdown in private credit creation, figures from the RBZ show, indicating that in the last two years, banks were lending less to the private sector despite growth in money supply.
All the money supply expansion was absorbed by TBs. TBs are a form of lending to government. Trade bills, which are a component of private credit, also dropped.
In a dollarised economy, the budget deficit would reflect as a drain on the current account and crystalise as a balance of payment, which is what Zimbabwe is experiencing.
Government is not just the biggest spender, but also the largest importer by extension and therefore the largest offshore mover of foreign currency. The Financial Gazette