RBZ firefights liquidity crisis

Source: RBZ firefights liquidity crisis | The Financial Gazette February 16, 2017

THE Reserve Bank of Zimbabwe (RBZ) unveiled a cocktail of measures yesterday as part of the 2017 Monetary Policy Statement in a desperate bid to liquefy an economy that is slowly grinding to a halt due to a severe liquidity crisis that has resulted in companies failing to settle on time their external payments for raw material and other products.
The illiquid conditions have been occasioned by a serious mismatch between exports and imports, whereby the latter has exceeded the former by far, resulting in the rapid depletion of nostro accounts.
John Mangudya, the RBZ governor, has been on an aggressive campaign to encourage exports, with his policy interventions focused on achieving the same objective.
Nonetheless, exports have remained poor owing to a combination of endogenous and exogenous factors, hence the need for additional measures by the central bank boss to stimulate local production meant for the export market.
Yesterday, Mangudya unveiled a US$70 million package for nostro accounts to ease the payments gridlock.
The lifeline will bridge the gap until significant foreign exchange earnings begin to roll in as soon as the tobacco and cotton marketing seasons start.
This is the second such package announced by the central bank after another US$215 million was injected in September last year.
The US$70 million is part of multi-pronged strategy meant to preserve foreign currency, make the right priorities and boost the country’s capacity to settle foreign commitments, after complications worsened in the past six months.
Other measures include fostering surveillance on combating money-laundering, tax evasion and transfer pricing; extension of the export incentive scheme to the tourism sector and cotton growers; scaling up operations of micro-finance institutions; revamping a US$10 million horticultural facility; the unveiling of a US$10 million business linkages facility and the launch of a US$15 million revolving fund for women empowerment.
In addition, the apex bank said it will also enforce the preservation of foreign exchange in nostro accounts through market and institutional discipline as well as domesticating the settlement of local card transactions on international card switches.
The latter essentially means that funding in nostro accounts wiould be deployed strictly for servicing foreign commitments, while domestic transactions would be paid through the Real Time Gross Settlement System, ZimSwitch, VISA, Mastercard, local mobile banking and bond notes.
The use of nostro accounts to settle domestic transactions had exerted tremendous strain on banks and precipitated foreign currency shortages.
“Foreign exchange/nostro stabilisation facility of US$70 million to be disbursed by the end of February 2017 in order to deal with the current delays in the processing of outgoing payments for the procurement of productive imports,” the RBZ governor said.
“The measure is necessary to augment the foreign exchange resources in the banks’ nostro accounts whilst awaiting the opening of the tobacco and cotton selling season,” he added.
The RBZ’s intervention came as its analysis showed a “substantial” amount of the US$206,7 million that was used to settle card and DSTV transactions between July and December last year was channelled through nostro accounts.
These would now be settled through domestic channels to help the country release funding towards the importation of vital raw materials and other critical requirements.
As part of the strategies, the RBZ will also increase a gold support facility for small to medium scale producers to US$40 million, from US$20 million.
An implosion had been brewing in several critical industries on the back of a worsening payments gridlock in the financial services sector with imported raw materials running out at some plants around the country, raising the spectre of more company closures and job losses.
The worst hit has been the manufacturing industry and the mining sector, which contributes a significant portion of the country’s export receipts.
Indications are that gold mining companies could mothball operations due to failure to secure foreign currency for raw material imports, with dire consequences on the entire economy.
Yesterday, the RBZ also moved to stimulate demand by acting on interest rates and bank charges.
It capped lending rates at 12 percent starting April and directed banks to ensure that the highest charge for application fees, facility fees and administration fees does not exceed three percent.
“A proportional pricing model was adopted to replace the fixed charges in order to align cash withdrawal charges to amount withdrawn. The applicable charges for cash withdrawal were set at a maximum of one percent and 1,25 percent of amount withdrawn for automated teller machines and over-the counter,” the RBZ said.
The central bank said it has negotiated for the extension of the US$200 million African Export-Import Bank trade debt-backed securities facility by a further two years to 2019.
The facility has assisted the RBZ in maintaining financial sector stability and inclusive growth.
“It has been a game changer that revitalised the banking sector in Zimbabwe. Total trades under this facility amounted to US$641 million over a two-year period from the effective date of the facility in February 2015,” added the statement.
In addition, the central bank unveiled measures to preserve the parity of the bond notes, which were introduced to fund the export incentives in November last year, to the US dollar.
“The bank is directing financial institutions to strictly observe the policy to deposit bond notes into the US dollar accounts without requesting the banking public to differentiate between bond notes and US dollar cash. This measure is essential to ensure that bond notes continue to trade at parity with the US dollar and to reflect the fact that bond notes are supported by the US$200 million offshore facility to support the demand for foreign exchange attributable to bond notes. The foreign exchange under this facility is made available to banks in line with the import priority requirements on request from the bank,” said the statement. It said a credit registry has been established to cushion banks against non-performing loans.