adminThe current poor state of the local interbank market is directly related to the fact that the Government has in recent years not been issuing any securities such as Treasury bills owing to absence of fiscal space to accommodate additional higher interest costs.
The cost of funds in the country has been high following the adoption of the multi-currency system due to perceived country risk and tight liquidity conditions.
In its latest newsletter, the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) says that the lack of an interbank market in Zimbabwe has forced banks to compromise on their key roles.
“The absence of money market instruments, in the form of Government paper, has virtually compromised the smooth functioning of the interbank market, as banks and market participants cannot trade without suitable and acceptable collateral instruments, to cover counter-party risks.
“The absence of a government paper in the economy has also resulted in banks resorting to levying higher charges on deposits and to increasingly rely on other non-interest sources of income, due to lack of liquid instruments to facilitate their traditional intermediation role,” said MEFMI.
Interbank activity in the local financial services sector is expected to remain tight in the foreseeable future due to the lack of money market instruments.
The 2012 National Budget was conspicuous in that it did not indicate any plans by the monetary authorities to issue money market instruments.
The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend, and the core of the money market consists of interbank lending. Trading in the money markets typically involves Treasury bills, commercial paper, and shortlived mortgage and asset-backed securities among other instruments, and can provide liquidity funding for the financial system.
Anticipations were that the Government could soon issue a number of money market instruments that would re-ignite local interbank activity, which has been depressed since the introduction of the multi-currency system in early 2009.
The non-issuance of money markets instruments, however, is part of the broader strategy by the Government at exercising fiscal prudence – the “cash-budgeting system”.
The cash budgeting strategy is largely viewed as a means to entrench macro-economic stability and confidence.
Some observers, however, believe that issuing Treasury bills does not necessarily have to counteract the cash budgeting system.
“The Government is mindful of its cash budgeting framework, but issuing Treasury bills is not inconsistent with cash budgeting – only front loading certain expenditures, which can be appropriated on an on-going basis.
“The Government does not have to issue a large amount – even a notional amount of US$10 million may be sufficient to guide the market on the interest rate structure that it deems consistent with the current fundamentals,” said one economist.
The local interbank market could, however, get impetus from the proposed US$100 million recapitalisation of the Reserve Bank of Zimbabwe’s Lender of Last Resort function, although the fund’s yet-to-be-defined operational modalities may still be a sore point.
There have been concerns, for instance, that the US$7 million allocated to the central bank in 2010 has not been accessed due to its stringent terms, especially the one requiring title deeds of immovable property for intra-day access.
Online Reporter