OPINION – Forex crisis: how banks helped create liquidity mess, and why ZIMRA should play hardball

(pic: REUTERS/Philimon Bulawayo)

By Pascal Mandeya

The Zimbabwean economy is currently facing shortages of essential imports such as fuel and medicines, and root of this crisis is at the banks where foreign currency holdings are not enough to meet depositors’ daily requirements.

This has led to rationing and diversion of foreign currency which has in turn fueled the parallel market and created arbitrage opportunities, forcing the government to intervene directly in areas where it should normally only play a regulatory role. The mismatch at the banks is a result of a combination of growth in deposits, reduction in foreign currency holdings and a change in depositors’ savings behavior.

Depositors generally now want to convert their deposits to real foreign currency cash and other physical assets leading to price instabilities. Some depositors now fear losing their money like what happened in 2009. The recent revision of the Intermediated Money Transfer tax, the separation of foreign currency accounts into Nostro and RTGS accounts and talk of removal of bond notes have worsened situation.

What role did banks play in creating the liquidity crisis?

Various explanations about the causes of foreign currency shortages at the banks have been put forward and a lot of solutions have been proposed. However, deposits grew mainly by banks discounting Treasury Bills (TBs) and lending to both the government and the private sector. While some TBs were issued directly to banks to meet government salary payments, the banks were under no obligation to discount TBs issued to the public. These would have been discounted by depositors without increasing deposits.

Banks have made good profits out of this situation and since they are effectively protected from depositors by law, they have no incentive to resolve the crisis.

Latest figures show deposits of $9.5 billion and foreign currency holdings of only $0.23 billion. Outstanding private sector loans were $5.28 billion if we include the $1.2 billion now at ZAMCO. Government had an overdraft of over $2.3 billion at the Reserve Bank of Zimbabwe. Government net debt was $7.7 billion.

Can we export our way out this crisis?

Export growth has been cited as a long term solution to the problem. However, the impact of exports in solving the crisis is usually misunderstood. Increased exports will not reduce the gap as export receipts add to both deposits and foreign currency holdings. There will just be more foreign currency to distribute to a larger deposit base. This might reduce the impact of the gap, but not its size. Increasing exports lead to increased production and employment, but also generally require more foreign currency up-front to achieve. Without a change in savings behavior, increasing exports will not alleviate the crisis.

It therefore makes sense to encourage people to voluntarily keep their deposits in the bank by, say, offering higher interest and security. It is also sensible to reduce the deposits by offering depositors alternative interest earning financial instruments like TBs and Savings Bonds. It is very difficult to increase the foreign currency holdings without also increasing deposits for example getting foreign credit lines.

Give to Zimra what belongs to Zimra

There have been very few meaningful local private sector investments after 2009 to validate the $5.28 billion outstanding at the banks. The government is borrowing not only because its expenditure exceeds income, but also because of poor tax collection.

There seems to be very little progress at ZIMRA in recovering the $4.5 billion that they are owed, which would reduce the government debt as well as bank deposits. There is no justification for not remitting taxes. Most of ZIMRA’s tax revenue is from Excise Duty, VAT and PAYE where the debtor is not the taxpayer but just an agent for collection. The product buyer and the employee are the taxpayers while the seller and employer are just agents for collection. In most of the cases the agents would collect from the taxpayers but not remit to ZIMRA.

Corruption within ZIMRA and political interference have been cited as hindrances and they should be eradicated through additional legislation and enforcement. It is incorrect to say that ZIMRA can just arbitrarily impose taxes and penalties. All taxes and penalties are approved through the budget and supporting legislation and there is a court process available for parties that want to dispute their ZIMRA assessments. The irony is that some of the money creating problems for government is indirectly government money that ZIMRA has not collected.

Dropping 1:1 – What are the dangers?

Electronic money (e-wallets, RTGS balances) and bond notes are not new currency. The difference in value between these forms of money outside the banking system is debt factoring, which is a financial transaction when a creditor sells accounts receivable to a third party at a discount to get cash. In our case the banks are the debtors being factored. When factoring a debt the discount is offered to the factor but the debtor must still pay the new creditor the full amount.

There have been serious calls to “devalue or float the bond note and RTGS balances”. These calls have not been backed by explanations of how this would work. The basis of these calls is a basic misunderstanding of the law of supply. The flawed logic is that removing the current 1:1 ratio will attract foreign currency into the banks without realising that a new rate would also then apply when withdrawing therefore there is no real incentive to the depositor.

There is no reason to believe the foreign currency will then become available at the banks. In fact this solution creates a moral hazard where banks would continue to profit from inconveniencing customers. Banks could also easily create a spread between bid and offer rates, for example they could offer a rate of 1:3.5 for depositors and 1:4 for withdrawals at the exact same moment.

Currently only those who are willing to discount their deposits on the parallel market (and break the law) are realizing their losses. The removal of 1:1 to, say, 1:3.5 (an estimate of the parallel rate) would mean officially deposits would be reduced from $9.5 billion to $2.7 billion – a loss of $6.8 billion. Conversely, private sector debt at banks would be reduced from $5.28 billion to only $1.5 billion – a gain of $3.78 billion.

Reducing deposits by selling TBs to depositors and repayment of loans by both government and private sector will ensure that the foreign currency available will be enough to meet depositor’s daily requirements as was the case between 2009 and 2016, without penalising depositors and unjustly enriching borrowers and banks.

While we expect the government to step in when there are incidents of market failure, it is also more important for the public to advocate for practical solutions that are logical. Pressure must be brought to bear on banks to resolve the crisis they largely created.


The writer, Pascal Mandeya, is an economist