Online Reporter
CENTRAL banks have a range of tools to manage liquidity in a banking system and the wider economy to keep everything on an even keel of growth and inflation within set targets. The Reserve Bank of Zimbabwe also has to cope with a dual currency economy.
The two major settings that have to be made every quarter when the Monetary Policy Committee of the Reserve Bank meets are the bank policy rate and the statutory reserves. The bank policy rate is, in effect, the minimum interest rate that a commercial bank can charge a borrower and generally only the most secure and favoured customers get close, with most borrowers having to pay a little more.
In its last meeting last month, the Monetary Policy Committee, which combines top executives of the Reserve Bank with influential economic advisors outside the bank, decided to keep the 35 percent on ZiG loans that has served so well to maintain stability.
This is significantly higher than the annualised inflation rate each month since the reset of exchange rates in September last year, and so kills any possible profit by speculators borrowing money to play the stock markets or foreign currency markets. While not crippling borrowing for consumer spending, the rate certainly must make consumers interested in borrowing think several times before signing the papers.
But it is on the high side when the needs of the productive sectors are taken into account, manufacturers, miners and farmers and some in the tourism sectors, who need to borrow, even if just short term. Longer term borrowing would be even more difficult.
The other tool the committee has is to remove liquidity from the market by making banks place a percentage of their deposits with the Reserve Bank, meaning that money cannot be lent out. The committee decided to maintain the range of percentage at 15 percent for money in savings and time accounts and 30 percent for demand and call deposits. The percentages are the same regardless of currency.
With liquidity seen as very tight in Zimbabwe, these percentages would probably, in a single currency economy and in one where all banks gave significant priority to productive customers, be reduced. The Reserve Bank, and the general economy, face additional pressures. The banking sector is not a monolithic uniform system, but rather a number of commercial banks driven by what they see as commercial needs and pressures. They also vary considerably.
All banks are prepared to make consumer loans, usually based on payroll security, with each bank having a different percentage of such loans in its loan book. Some banks are willing and able to make careful ZiG loans, but some do not regard the ZiG business as very important.
While they obey regulations and open ZiG accounts and accept ZiG deposits, they are not that active in the other half of the ZiG business.
So the Reserve Bank had to step in with a third policy to cope with the variable banking sector and the dual currency. While the statutory reserve rates were maintained at a higher value than some would see as ideal, a chunk of this money on deposit from the commercial banks with the Reserve Bank is lent out in what is called the Targeted Financial Facility launched in February this year.
So far around ZiG350 million of the laid-down maximum of US$600 million has been lent out, easing the liquidity problems in the economy but, since the money already exists and is simply been deposited with the Reserve Bank, no new money has been created.
The facility has a lower interest rate, 30 percent a year, still a real interest rate but not so high as commercial bank loans, and most importantly can only be used by those in the productive sectors for productive borrowing, the real targeting.
Reserve Bank Governor Dr John Mushayavanhu did complain earlier this year that some banks were not pulling their weight on lending, especially ZiG lending, preferring to just dump their surplus with the Reserve Bank. This facility appears to be part of the measures taken to build up what would be a normal banking market.
In time, as more and more economic and commercial activity is done in local currency, it is likely that the banking system will be more uniformly keen on proper credit and lending to customers, and the alternative of a lower statutory reserve percentage and no special facility can be run.
But there is also the additional problem of making sure that liquidity appears in sectors where it will do the most good and is needed for productive growth. The strange convulsions in the Zimbabwean economy over the last two decades did see banks funding speculators and consumers far more than producers, and that in turn led to some of the inflationary and other pressures.
The monetary authorities have managed to clamp down on that, with the present insistence on real interest rates plus a bit extra to make sure that there are no gaps that speculators can slide through. But the potential over reliance on consumer loans in Zimbabwean banking still remains, with a culture among too many consumers to take delivery today and pay tomorrow.
Consumer conservatism will take time to build up, and a return to the old days of saving up for what is wanted rather than buying on direct and indirect credit. But the stable local currency and, we all hope, more interest from the banking sector in savings accounts will help.
But until those happy days return, the Reserve Bank has to be innovative, and it seems that by running a slightly higher statutory reserve rate for demand deposits and then using some of that money to ease liquidity in the sectors that really need it is the most sensible policy we have.
