daniel chigunwe
Tapiwanashe Mangwiro
The Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mushayavanhu, has cautioned against reducing statutory reserve ratios, warning such a move could lead to the re-creation of fake USD balances within the banking system.
The caution comes after Business Weekly, in last week’s edition, carried sentiments from analysts over statutory reserve ratios, with some advocating for lower reserves to free up more funds for lending.
These voices argued that the current reserve levels, set at 15 percent for call deposits and 20 percent for demand deposits, are constraining economic growth by locking up liquidity that could otherwise be invested in productive sectors.
In response, Dr Mushayavanhu emphasised that while the cry for more liquidity is genuine, there are critical risks associated with reducing statutory reserves, particularly in a multicurrency regime like Zimbabwe’s, where the U.S. dollar plays a pivotal role.
He underscored the dangers of creating virtual or “fake” USD balances, which have historically destabilised the economy.
FBC Securities’ analysis of the 2024 Mid-Year Monetary Policy Review stated, “The move to maintain high statutory reserves has left capital locked and idle, thereby not contributing to the growth of the economy.”
Raymond Madziva, a banker, argued that the liquidity challenges banks are facing are due to high statutory reserves.
“Banks are the lifeblood of the economy. They channel funds from savers to borrowers, enabling investment and consumption. However, when a significant portion of these funds is tied up in reserves, the ability to lend is severely constrained, leading to a slowdown in capital creation,” Madziva said.
According to Madziva, banks are struggling to finance critical sectors of the economy due to limited liquidity. The agriculture and manufacturing sectors, in particular, have been hardest hit, as they rely heavily on bank financing for working capital and investment in production facilities.
Dr Mushayavanhu defended the central bank’s position, pointing out the adverse impact of the multiplier effect on money supply.
“You should also consider the impact of the multiplier effect on money supply. It gets worse in USD lending because it results in the creation of virtual dollars,” he said.
The governor stressed that the economic environment in Zimbabwe is still fragile, and reducing statutory reserves could lead to a vicious cycle of currency instability similar to the one witnessed in 2018, when the country grappled with the dual existence of hard currency and created USD in the banking system.
“The challenge with USD lending in a multicurrency system is that every dollar lent multiplies across the system, increasing the risk of virtual balances. Without proper safeguards, we will re-enter the territory of phantom dollars, where the funds in circulation far exceed actual USD reserves. This poses a severe risk to monetary stability,” Dr Mushayavanhu said.
He added that while banks need funds to lend, the reduction of statutory reserves under current conditions would exacerbate risks related to the creation of virtual USD, especially in a country where the supply of real USD is limited.
The governor called for a cautious approach to ensure that the financial system remains robust and also noted that the arguments for reducing statutory reserves make more sense in a monocurrency regime, where the central bank can better control the money supply.
In such an environment, lowering reserve ratios would lead to more liquidity for lending without the added risk of destabilising the currency.
“In a monocurrency system, lowering statutory reserves would provide the desired liquidity for lending, supporting economic growth without the risk of creating phantom balances.
However, in a multicurrency system like ours, where we operate with both local and foreign currencies, the dynamics are different.
Here, we must remain vigilant against over-lending in USD to avoid creating fake balances,” Dr Mushayavanhu explained.
He emphasised that while the statutory reserve ratios may seem restrictive, they are necessary for maintaining the integrity of the financial system in a multicurrency regime.
Lowering these reserves without a comprehensive risk management strategy would endanger the stability of the banking sector.
Dr Mushayavanhu’s warnings are not without precedent. In 2020, Finance, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube pointed out that Zimbabwe had previously created United States dollars through borrowing from the central bank and issuing Treasury Bills to cover state-owned entities’ indebtedness.
This practice led to the creation of a significant amount of virtual USD, which fuelled inflation and led to the economic crisis that the country is still recovering from.
“When I came in as Finance Minister in 2018, I realised that there was a hard currency in the form of USD, which was being deposited by industry, and a created USD in individual bank accounts. That was the inflation driver, as the large amounts were a created currency denominated in USD,” Ncube said.
Ncube’s response to the lawsuit over the created money highlighted the dangers of unchecked monetary expansion, especially in a fragile economy.
The distinction between real USD and virtual USD was a critical factor in the country’s financial instability.
The debate over statutory reserves underscores the delicate balancing act that Zimbabwe’s monetary authorities face.
On one hand, the economy requires more capital for growth, on the other hand, too much liquidity particularly in USD could destabilise the financial system by creating virtual balances.
Dr Mushayavanhu has been clear in his stance, the risks associated with lowering statutory reserve ratios in the current multicurrency regime outweigh the potential benefits of increased lending.
The RBZ’s focus remains on maintaining financial stability, even if it means constraining growth in the short term.
Bongani Ndlovu