Zim dollar return haunts banks: AfDB

via Zim dollar return haunts banks: AfDB – DailyNews Live by John Kachembere  24 SEPTEMBER 2013

Zimbabwe’s declining long-term deposits is associated with depositors’ speculation on the possible return of the local currency after elections, the African Development Bank (AfDB) has said.

The southern Africa nation ditched its local currency in 2009 after being rendered worthless by hyper-inflation with the government opting for more stable foreign currencies led by the US dollar as well as the South African Rand and Botswana’s Pula.

However, during the election campaign there were calls by President Robert Mugabe-led Zanu PF of a possible reintroduction of the local currency ? resulting in a run on deposits.

AfDB noted in its August monthly economic review that the country’s annual growth in broad money supply (M3), defined as total banking sector deposits (net of inter-bank deposits), declined from 23,8 percent in June 2012 to 6,9 percent in June 2013.

“On a month-on-month basis, M3 declined from 1,3 percent in May 2013 to -4,5 percent in June 2013,” said AfDB adding that the decline in M3 growth was underpinned by the decline in total bank deposits.

“However, the decline in deposits is likely to be temporary, if authorities provide credible guarantees of the continued existence of the multi-currency regime,” said the continental financial institution.

AfDB noted that the public is against the return of the Zimbabwe dollar before the macroeconomic environment really improves.

“It is important to note that the economy is currently slowing down, and depositors are cognizant of this,” warned AfDB.

In June 2013, annual total banking sector deposits increased to $3,84 billion from $3,59 billion in June 2012.

However, on a month-on-month basis, total banking sector deposits declined from $4,02 billion in May 2013 to $3,84 billion in June 2013.

The decline in total bank deposits, said AfDB, was driven by a run on deposits in the run-up to general elections.

“Some depositors withdrew their money due to uncertainty regarding the tenure of the multi-currency system following elections.

“Depositors are said to fear the return of the Zimbabwe dollar, in which they lack confidence,” said the bank.

Local banks that suffered the most in the deposit run are those that depositors perceived to be weak.

Much of the run took place in Bulawayo, the second largest city in Zimbabwe.

Shortly after the elections Gideon Gono, Reserve Bank of Zimbabwe (RBZ) governor, was forced to calm markets following a run on deposits.

Unconfirmed reports indicate that close to $700 million was withdrawn during the period.

“The multi-currency regime will be with us for the foreseeable future and in any case, when the time comes, the local currency will circulate alongside other existing currencies with people exercising their choice of currency to hold,” said Gono.

The decision to dump the local currency is credited with helping end the hyperinflationary mayhem of the period leading up to the disputed 2008 elections and putting the country’s economy on the road to recovery.

Still, Gono said while hyperinflation had been termed, some of the conditions which led to the introduction of foreign currencies remained.

“Stakeholders are also advised that the multi-currency regime is not an area of emotional choice or option but rather a measure officially introduced in January 2009 as part of our adaptive economic strategy and a pragmatic response to the challenges of the day,” he said.

“While the hyper-inflation challenge is now a thing of the past, a number of other deep-seated challenges which bedevilled the economy prior to 2009 are still with us, hence the need to stay the course.”

The decline in total bank deposits in June 2013 is attributed to the significant decline (16,37 percent) in long-term deposits.

Demand deposits, and savings and short-term deposits also fell by 2,74 percent and 1,03 percent, respectively.