By Kudzayi Zvinavashe.
Zimbabwe’s banking sector was recently hit by massive cash shortages that have seen citizens in exaggerated queues in the country as they try to access their money from banking halls and Automatic Teller Machines (ATMs). As a way forward the Reserve Bank of Zimbabwe (RBZ) announced it will introduce bond notes into circulation as a way of alleviating the crisis.
There has been many theories from the masses on how Zimbabwe got into this crisis but RBZ’s story is there has been outflows and they have been sticking to it blaming the business community for taking money out of Zimbabwe’s economy. Kalabash Media’s Kudzayi Zvinavashe catches up with a banker who gives us an insight into the messy Zimbabwean banking sector and the bond notes on condition of anonymity. On the 4th of May, Zimbabwe central bank known as Reserve Bank of Zimbabwe (RBZ) announced their intentions to introduce Bond notes as an effort to ease the liquidity crisis that has seen exaggerated queues in banks and automatic teller machines (ATMS). One thing that they have conveniently left out is explaining how Zimbabwe got into this crisis. For reference purposes we will call this anonymous banker Amanda (not her real name).
Background
The banking system of any country is split into two categories that is the local banking system known as the Real Time Gross Settlement (RTGS) system. This system is for all transactions that take place within the country’s banking sector, the internal deposits, money transfers within Zimbabwe are in this system.
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The second category of banking is the offshore bank account which is known in the banking sector as nostro accounts. Banks involved in international transaction have these accounts to enable them to manage their clients’ funds, this entails receiving money or sending it out funds on behalf of their customers.
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It is through the nostro accounts the Telegraphic Transfers, the visa/ MasterCard transactions and other international transactions are made. Any form of transaction between a local entity or individual and a foreign based party is made possible by these accounts.
In the past the banks have oiled the rusty Zimbabwean economy with liquidity as they import money making use of their nostro accounts. There are players in the international market who facilitate the availability of cash to be flown into the countries like Zimbabwe and are paid through the nostro accounts. With the central bank still under sanctions by the United States of America, Zimbabwe has no direct line to the US central bank hence they have often relied on the local banks to facilitate cash imports for them for a fee. The absence of an agreement with the US government to use their currency, RBZ should have been backed the currency in circulation with some reserves like other countries do.
Current Situation
The local bank’s nostro accounts have been low on balance due to the fact that Zimbabwe is a net importer, meaning the landlocked country imports more than in exports. This has made it difficult for the banks to bring in money. Gathering little amounts within the country to send out for the purpose of crediting their offshore accounts takes time and is expensive for the banks. To go around this issue banks have to hold on to the money they are getting until it’s a substantial amount enough to send out of the country. The money is loaded on a plane and sent overseas to credit their offshore accounts. The process of sending out money to credit a nostro account is known as repatriation in banking. As a result there has not been much Telegraphic Transfers going out as the balance of the nostro accounts is low. Repatriation process is time intensive meaning it will take longer to process any outside payments. RBZ in a bid to salvage the situation have crafted a priority list stipulating who should take precedence sending out money given its current limited nature in the banking sector. It will be difficult for the ordinary man to make payments let alone small businesses hence they risk making their business relations with international counterparts sour due to delayed payment.
The list is as follows…
FOREIGN CURRENCY PAYMENTS PRIORITY LEVELS
Priority One (HIGH)
i. Net exporters who import raw-materials or machinery to aide them to produce and generate more exports;
ii. Non-exporting importers of raw materials and machinery for local production (value addition) that directly substitute import of essential finished goods;
iii. Imports of critical and strategic goods such as basic food stuffs and fuel, health and agro-chemicals granted these goods are not available locally;
iv. Repayments of offshore lines of credit procured to fund productive
activities;
v. Payments for services not available in Zimbabwe;
vi. Foreign investment income remittances (profits and dividends).
Priority Two (MEDIUM)
i. Bank borrowing clients in the productive sector who engage in critical and strategic imports.
Priority Three (LOW)
i. University and college fees for students already enrolled in courses abroad.
ii. Cash depositing clients in the retail and wholesale service industry. The customers generate cash which can either be recycled for local use or repatriated to replenish nostro accounts.
iii. Other borrowing clients who have engaged in the importation of non- strategic goods.
NOT PRIORITY
i. Capital remittances from disposal of local property
ii. Capital remittances for cross border investments
iii. Funding of offshore credit cards
iv. Importation of trinkets and/ or goods or services readily available in
Zimbabwe including non-commercial vehicles, maheu, bottled water,
vegetables.
v. Donations
Where RBZ and Government Got it Wrong…
Amanda says before the dollarization of the economy, banks used to hold their clients funds in the RTGS system until the RBZ issued a directive to banks that all the money in the RTGS system would be held by them (central bank). What this did was cripple the banks from investing the money in any way, in accounting the money will be written in the bank’s books as funds held by the central bank. The banks have no access to the money that got into the system rather the central bank and the owner of the money are the only two parties that could access the money.
With the RBZ sitting on the cash, there are suspicions that the ministry would often take a bit of money to fulfill their pressing issues like salaries etc. There is even speculation that these funds were at the mercy ofthe government. This is something that has been implied by MDC T’s Eddie Cross who recently said,“For months we have been asking ourselves, where does Chinamasa get the money to pay salaries and the 2015 bonus? We should have known that they could not print money and therefore that what they were doing was robbing the bank! Now that the bank is empty – they are going to print money, simple really. ”
Cross continues to question how Chinamasa has been balancing his books, “The question is where did Chinamasa get the money to meet the deficit? Partly by simply running up credit and increasing the total debt of the State and partly with Treasury Bills. The Ministry of Finance released a schedule of Treasury Bills issued up to the 31st December 2015 and this showed $2 billion owing to local creditors. Remember that a TB is just an IOU – a promise to pay, signed by the Minister or the Governor of the Reserve Bank. “
Eventually the shortfall in the RTGS system has made the entries become mere numbers in a ledger with the real money gone hence the government has since decided to introduce the controversial bond notes to make up for the real currency that was squandered over the years. Amanda’s opinion of Mangudya references the article recently published that likens the man to a turtle on a fence which no one knows how it got there but knows it doesn’t belong there. She adds that, “his principles are in the right place but he doesn’t strike me as a man who is strong willed enough to say no to people”.
Will the Bond Notes be Adopted into Circulation?
The adoption of the currency is inevitable given the government will pay the public service with the currency and banks will issue the currency. The recent directive that demands banks to transfer half of the local clients receiving money paid through the banks’ nostro account to the RBZ’s foreign account.
In turn the central bank will credit the local client with that money in the RTGS system with an additional 5% of the amount transferred to the RBZ. So in any case the local client who is credited half his/her money in the RTGS will use it to pay wages and other financial obligations locally.
Amanda gives an example to this scenario saying, “Zimbabwean based Platinum company X will receive their 1 million dollars payment into their local bank’s nostro account, and the bank will have to send 500 000 dollars to the RBZ nostro account which in turn the RBZ will credit Platinum company X in RTGS currency.”
What could go wrong in this case is Zimbabwe would be starved of foreign currency with the blue chip companies telling their clients not to pay them, at least not through their bank accounts. These could go in the company’s books as uncredited goods or services. A logical scenario to this would be, “Platinum company X expects a large amount of payment from their foreign customer, an amount so large they cannot afford to spend half of it locally. For example they are owed 2 million dollars and they would tell their customer not to pay them, rather hold on to the money as they figure out a way around it.” The introduction of bond notes leaves the banking sector with a hot potato to juggle as they would want to account for the bond notes separately from the US currency.
What to Expect and What Could go Wrong
Zimbabwe could re-live some parts of the 2008 ordeal as critics expect an increase of money changers in the streets as the bond note will not equate to the US currency for long. Empty shelves in supermarkets and similar cases will be witnessed across the board as many fail to make payments outside. Corruption will take its toll and the local bigwigs will take the little US currency available. Donor funding to the country will be affected as the donors may lose confidence in sending the money into the local banking system. Sending out money will be more expensive than it is now. The ordinary person will send out money through informal channels like the cross border bus drivers among many other creative means.
Going Forward
Zimbabwe needs radical individuals who will be able to bring the economy back to life and introduce a system that guarantees the people’s money. Because after all it is the poor who ultimately suffer the most during a cash crisis as the wealthy have access to foreign bank accounts. A perfect start would be an explanation and an admission of theft of the people’s money by the RBZ and government. Yes, the RBZ needs to champion the adoption of electronic cash with reasonable transaction charges. But at the same time the central bank needs to be run independently from politicians. As a way of combating corruption public office holders must declare their assets and these be made public. Many analysts share the view that the government needs to admit that they dipped into the people’s money and find a progressive solution instead of a cover up solution all in a bid to safeguard votes in 2018.
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