General

IMF warns Zimbabwe to stop ‘printing valueless money’

July 21, 2017

The International Monetary Fund (IMF) has warned that Zimbabwe’s creation of money through electronic payment platforms spells doom for the country’s financial sector as banks were spending what they did not have.
The government has resorted to issuing Treasury Bills (T-bills) to finance its business, and electronic funds transfers unsupported by cash reserves overdraft facility had set in motion “the creation of money in the nominally dollarised economy” due to the absence of sufficient cash reserves.

Government entities, said the IMF, are spending “the borrowed funds by crediting bank accounts of the payment recipients (employees, suppliers, contractors) through the real time gross settlements (RTGS) electronic system”.

Official statistics show that, at current levels, TBs held by commercial banks are now 1.7 times the level of bank equity capital, up from 1.3 times at the end of 2016.

“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.

According to the IMF report, government borrowing could worsen banking sector confidence, thus boosting financial sector vulnerabilities and market segmentation.

“The banking sector, once affected by hyperinflation, is now being pressured by the elevated fiscal financing needs, which are crowding out private sector credit and raising operational risks of banks and corporates.”

Imara Asset Management chief executive John Legat has also raised the red flag over the current holdings of TBs, which he said could destabilise the fragile banking sector.

“In our view this ratio should be setting off alarm bells in the banks’ boardrooms, but clearly it is not,” said Legat in a research note titled The Great Illusion.

“Loans to the private sector are lower than a year ago, reflecting managements’ lack of interest in lending to the private sector where non-performing loans have been a problem for them. The private sector has been largely crowded out by government. So banks have channelled their rising deposits back into TBs. They have all but curtailed the ability of depositors to withdraw their money in the form of cash, hence the long queues that now exist outside the banks.”

Explaining the gravity of the situation, the IMF said the Reserve Bank of Zimbabwe (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”.

RBZ governor Dr John Mangudya said exports were lower than imports at the moment, resulting in expenditure being more than the income. “At the end, government is forced to borrow from the local market and this increases money supply – money which, however, is not backed by foreign currency. When the civil servants and other workers are paid they want to access their money in notes. They want to access money which is not there.”

Mangudya said the solution lay in pushing exports and securing more remittances from Zimbabweans living outside the country.

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.

The IMF said T-bills were no longer risk-free and liquid as they were subject to varying degrees of discounting in the market.