admin
A TIGHT liquidity situation is forcing Zimbabwean companies to scale back their operations as they cannot make payments to their suppliers outside the country due to depleting nostro reserves. This is grave cause for concern as industry might grind to a halt at a time Government is battling to kick start the economy.
Several companies rely on imported raw materials but they have been unable to pay their suppliers because their banks are failing to meet their international payment obligations. This has given rise to a situation where suppliers are demanding cash upfront for imports – a scenario which is totally untenable as Zimbabwe is grappling with a serious shortage of United States dollars.
A few weeks ago, fuel suppliers were faced with a dilemma as their suppliers started demanding cash up front. Government had to move in to contain a potentially volatile fuel shortage following reports that oil companies were failing to access foreign currency to pay for the importation of fuel as their nostro accounts were empty.
A nostro account refers to an account that a bank holds in foreign currency in another bank often used to facilitate foreign exchange and international trade transactions. Depleting nostro reserves are therefore inducing a severe strain in the economy as banks are finding it difficult to meet their international payment obligations. Experts have warned that unless the trend is contained, it could frustrate efficient industry operations and further cripple the economy.
Already, some companies have raised the red flag with their revenues hard hit by the parlous operating environment. Econet Wireless Zimbabwe has reported that its total revenue for the half year ended 31 August 2016 nosedived by 6.7 percent to $301 million from $323 million. “The depletion of the country’s foreign currency reserves, evidenced by a recurrent balance of payments deficit, has made it difficult for all companies to make payments to foreign suppliers of goods and services,” Econet board chairman Dr James Myers said in a report published in yesterday’s edition of Business Chronicle.
“As a result we have been unable to make certain debt repayments on time, notwithstanding that cash was available in our local bank accounts.” He warned the situation was likely to persist unless appropriate measures were taken. Several companies rely on imported raw materials in their operations, which contribute to the high import bill.
Since 2009 Zimbabwe has maintained average trade deficits of about $3 billion with current account balances as a percent of GDP averaging -22.5 percent, well over the red flag level of negative five percent. Experts say these levels of deficits are not sustainable for a dollarised economy. In the meantime Dr Myers revealed that the diversified telecommunications firm was engaging its lenders and would continue to explore mutually acceptable solutions.
The situation has seen firms failing to get their products on time forcing some to engage foreign banks who reportedly charge up to 10 percent premiums for any payment. A local company executive who requested anonymity said: “Nostro accounts integrate an economy with the international finance system. With depleting foreign exchange reserves it means companies cannot efficiently import critical raw materials on time and this cripples operations,” said the executive.
Coal miner Makomo Resources has indicated that its operations were under threat as its fuel suppliers were demanding cash upfront on all transactions. Of late the RBZ has been forced to revise upwards the threshold of nostro accounts to 10 percent from the previous five percent.
However, surveys have shown that the liquidity trends from 2009 to April 2016 indicate that cash balances on the country’s nostro accounts have been depleted over time.
For example, a study on Zimbabwe’s macro-economic stability and policy options (August 2016) indicates that the country’s nostro accounts, which held about $424 million in 2009, have dropped to less than $150 million. “As of April 2016 hard cash balances comprising notes and coins and nostro accounts were estimated at six percent of banking deposits. Notes and coins alone were three percent of total deposits while nostro accounts were also three percent of deposits,” reads part of the survey.
“What this means is that as at April 2016 there was slightly over $100 million cash in the banking system available to service over $4 billion of deposits. Thus at that date there were over $4 billion of deposits that were real time gross settlement (RTGS) balances not matched by available hard cash.” This is clearly an unsustainable scenario and we urge the Central bank to find ways of remedying the situation.
We also hope the introduction of bond notes – which are export oriented – will assist in improving liquidity as exports are ramped up and foreign currency inflows improve. Imports are draining the little foreign currency in the country and increasing capacity utilisation in industry and improving productivity in agriculture should be the main priorities for the nation.
Online Reporter