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With the local currency now largely stable, the Reserve Bank of Zimbabwe (RBZ) has said banks should be confident to lend in ZiG, as the risk of depreciation has significantly reduced.
This comes as some local banks have reportedly scaled down ZiG lending, citing liquidity constraints.
In a Podcast interview with ZTN Prime yesterday, RBZ Governor Dr John Mushayavanhu attributed the banks’ reluctance to lend to apprehensions about the potential for depreciation, arguing that the currency’s stability should encourage lending.
Dr Mushayavanhu said ZiG had maintained relative stability while demonstrating firm appreciation against the US dollar, including on the parallel market, providing a basis for banks to increase their lending activities.
He said banks were losing potential income by not lending, as they feared currency depreciation would negate their loan returns, citing past instances where high depreciation rates wiped out interest gains.
However, the central bank chief stressed that the RBZ had “walked the talk” in stabilising the currency, noting nearly a full year of relative stability.
He expressed confidence that the demonstrated stability should encourage banks to “rethink their strategies” and engage in more active lending.
“We are almost going full year. The currency is stable. And I am sure that should force the banks to rethink their strategies to say, this currency is stable,” he said.
Dr Mushayavanhu raised concerns about the lack of interbank lending and the resulting stagnation of capital within the financial system.
Since its launch in April last year, the ZiG held firm against the US dollar at around 13 before depreciating sharply to approximately 24,4 on September 27.
It has since remained relatively stable and closed on Friday at 26,5/US$1. Even on the unofficial market, exchange rates peaked at about 42, but have since fallen to around 32 against the US dollar.
Dr Mushayavanhu addressed audience concerns regarding the potential for contractor payments to destabilise the currency.
He clarified that the central bank would neither create new money nor provide loans to the Government to finance its obligations.
Government contractors, the central bank chief said, will be paid using funds already in the system.
Previously, currency depreciation was attributed to large payments to Government contractors who went on to buy foreign currency on the black market.
“(The) Treasury collects money in the form of taxes, which is money that is already in the system, it’s not printing. There is only inflation if we have a situation where the Treasury borrows from the central bank to pay the contractors, and that has not happened since I came into the central bank.
“I think I have been on record as saying there is no overdraft facility for Treasury at the central bank, and I am in agreement with the Permanent Secretary in the Ministry of Finance.
“He has no appetite for borrowing from the central bank either. So, any misconception out there that the Government could be monetising the fiscal deficit through borrowing from the central bank is not true.”
The RBZ Governor said the prevailing currency stability also eliminates the financial incentive for contractors to acquire hard currency at premium rates, as such transactions would result in losses.
“You talk of contractors, when they get paid, even if they are being paid from money that is already in the system, they end up going to the parallel market,” said Dr Mushayavanhu.
“But increasingly, we are seeing that on the parallel market itself, even for contractors, they are seeing that they cannot sell their currency at maybe 35 or 40 simply for the purposes of getting the US dollar because the ZIG is stable.
“So why would you forego value just to get the US dollar when in fact, overall, in the economy, the US dollar exchange rate to ZIG has been stable? So again, that realisation is what has resulted in the parallel market strengthening,” he said.
With the Quarterly Payment Dates (QPD), Dr Mushayavanhu said ZiG demand was expected to increase.
“We saw it in December. People holding ZiG were being called by their banks to say can we buy your ZIG because they are holding foreign currency, but when it comes to paying tax, they are supposed to be paying that tax in ZiG, but they don’t have the ZiG. So, the time has now come for the holder of a ZiG balance in a bank to dictate the price as opposed to what was happening in the past.”
In Zimbabwe, people and companies who earn income (excluding employee income) need to pay taxes in advance on a quarterly basis. These payments, called Quarterly Payment Dates (QPDs), are due on March 25, June 25, September 25 and December 20.
Responding to claims of exchange rate manipulation due to the disparity between official and black market rates, Dr Mushayavanhu asserted that the Willing Buyer Willing Seller (WBWS) system accurately reflects the market dynamics.
He said the bank’s foreign currency reserves, comprising gold and foreign assets, were approaching US$600 million.
Dr Mushayavangu said that if one divided the amount of ZiG deposits in the market, about $14 billion, by the value of forex reserves, they would get an implied exchange rate of approximately 22 ZiG to the US dollar.
“So, if we wanted to control the exchange rate as the central bank, it would be above 22 because that is the only logical rate that we can think of that will be able to clear the market of ZIG,” he said.
Dr Mushayavanhu noted the acceptance of ZiG had been encouraging since its launch in April last year, with local currency transactions rising to 30 percent from 20 percent.
The Governor suggested that the ZiG’s adoption would have been even stronger had the drought not negatively affected economic activity, especially in rural communities reliant on agriculture.
