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Economist explains why nostro system in Zimbabwe is under threat

Prominent economic analyst Tinashe Murapata says the nostro system in Zimbabwe is facing threats from what he described as “barbarians at the gate” and “civil servants salaries”.

This comes after a notice seemingly announcing that some banks had decided to deactivate the nostro accounts’ ability to withdraw cash in US Dollar or loading US Dollars onto international credit cards was dismissed by the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya on Thursday evening after public outcry.

Commenting on the situation, Murapata, however, believes that nostro balances are not entirely safe especially for individual banks.

“As of March 2023, Zimbabwe nostro total deposits were US$2 billion of which it was supported by US$1 billion in actual physical cash and cash held in foreign banks offshore.

“The difference between total deposits and cash is credit deposits of US$1 billion. That is money created by the banks. At 50% ratio this is a very healthy position. At least as of end March 2023.

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“What was notable over the year of March 2022 to March 2023 is that actual physical USD cash has gone down from US$539m in March 2022 to US$457m in March 2023. The decline in the cash of US$82m was replaced by an increase in cash held offshore of approx US$80 million.

“The nostro balances in the overall banking system are safe. But the overall may not be true for individual banks. As an analyst I will not speak to individual banks positions.

“But, there is a real threat to the nostro system from two principle sources.

“I will assume banks don’t go on their own frolic in announcing new measures without the knowledge of their regulator. Banks are trying to protect the system so that it actually works. However the threat to the system is from two particular fronts;

“(a) Civil servants salaries and
(b) Barbarians at the gate

Prominent economic analyst Tinashe Murapata
Prominent economic analyst Tinashe Murapata (Picture via Facebook)

Murapata said the USD component of civil servants’ salaries from Treasury if not backed by real USD was a problem.

“Civil servants USD salary transfers from Treasury if not backed by real USD are a problem. The salary payments range from US$100 million to US$150 million monthly. Civil servants with a high marginal propensity to consume would quickly withdraw USD cash. Meaning they are replacing real USD with credit or local nostro that can’t buy beyond our borders.

“Yet it’s safe to assume that ZIMRA (Zimbabwe Revenue Authority) does have real USD from exporter taxes at least significant enough to back the civil servants salaries,” he said.

Murapata further explained the issue of “barbarians at the gate.”

“Whenever the official exchange rate moves the way it has done, the threat of shenanigans rises. Remember I spoke of government of Zimbabwe (GOZ) supplier “credit balances” that works in the same way as bank credit.

“The GOZ contractors owed by GOZ in ZWL will claim that they supplied goods to GOZ six months ago when the rate was 684. They would want their balances to be converted into USD at the six months ago rate of 684 when goods were supplied. Turning their ZWL to USD.

“I am not in anyway saying this is happening but this is a real threat to Nostro. Turning ZWL balances to USD. In the past the SaKunda TB’s allegedly had this impact into the system.

“IMF widely reported to have warned GOZ and RBZ that this is what crashed the monetary system back in 2019. After the official rate had been devalued.

“Sound familiar?

“It’s within good reason for RBZ and The banking sector to protect their unsuspecting clients from nostro credit balances not backed by USD. There are many NGO’s, Exporters and Companies that cannot keep their USD under the mattress but in the banking system.

“The barbarians are at the gate.

“It’s unfortunate the governor feels the need to backtrack. He must be supported fully in protecting Nostro balances sanctity,” he said.