US$ funding gap hits market

LIVINGSTONE MARUFU

 

The government has created a funding gap in the market by taking longer to settle local nostro balances paid to civil servants and contractors as the local foreign currency accounts are not backed by the US$, it has emerged.

Despite the central bank and two other financial institutions allaying fears of a gap in the market, highly placed sources told Business Times that banks are in a huge dilemma as they have few US$ to support huge balances amid growing fears of victimisation.

“We have the real nostro which is backed by the offshore funding then we have the local nostro which is backed by the Reserve Bank of Zimbabwe.  But on this local nostro, the RBZ is taking time to settle the US$ to the banks leaving them on the edge as the civil servants are quick to withdraw the cash for the cash that is not there,” a source said.

The source said the two banks that wrote letters last week were not off the mark.

“Those banks which were purported to have written those letters may not have erred as the banks are struggling to balance their books for the cash that is not there. This forces the banks to use cash for other clients to give to civil servants.”

Another source in one of Zimbabwe’s biggest banks said the nostro balances in the overall banking system are safe but the overall may not be true for individual banks.

“But, there is a real threat to the nostro system from two principle sources which are civil servants’ salaries and contractors. Civil servants US$ salary transfers from the Treasury if not backed by real US$ are a problem. The salary payments range from US$100m to $150m monthly. Civil servants with a high marginal propensity to consume would quickly withdraw US$ cash,” the source added.

“This means they are replacing real US$ with credit or local nostro that can’t buy beyond our borders,” a bank source said.

The source said the government could easily back that money from the real US$ from exporter taxes at least significant enough to back the civil servants salaries.

“The biggest worry is the contractors’ payment. The contractors owed by the government of Zimbabwe in ZWL$ will claim that they supplied goods to the government six months ago when the rate was ZWL$684 per US$1.  They would want their balances to be converted into US$ at the six months ago rate of ZWL$684 when goods were supplied.

“Turning ZWL$ balances to US$ would create some challenges in the market and the economy as a whole. In the past the Sakunda Treasury Bills allegedly had this impact into the system.

“IMF widely reported to have warned the government and RBZ that this is what crashed the monetary system back in 2019 after the official rate had been devalued,” a source said.

Analysts said it is within reason for RBZ and the banking sector to protect their unsuspecting clients from nostro credit balances not backed by US$ as there are many Non-Governmental Organisations and exporters.

Economist Gift Mugano said the mismatch between the real US$ and nostro was worrying.

“We learnt that around US$1bn has been lent out, we begin a circle of money creation as the bank charges, fees and interest rates for someone who does not earn US$. This is creating US$ in RTGS form.

“The Ministry of Finance has never been clear on how they are paying the civil servants. We don’t even know whether the civil servants’ salaries are backed by real US$ or not. But the possibility of the nostro balances not backed by real US$ is very high,” Mugano said.

“The worrisome things are that if these nostro balances are backed by hot air, the banks will create money through charges and fees not backed by real money.

“Also government paid the contractors 50% in US$ and we were not shown the spread sheet on how it was going to fund them and this brings the money creating theory into play.

“The treasury seemed to have created fictitious money to fund their projects,” he said.

RBZ was last week forced to calm the nerves of the market after leaked internal communication by two banks raised concern on nostro accounts.

Central bank chief John Mangudya said the foreign exchange liquidity position of banks stands at 60% in both cash and balances held with foreign correspondent banks.

“In that regard, statements allegedly made by certain banks, and shared via social media, purporting that funds held in foreign currency accounts (FCAs) (popularly referred to in Zimbabwe as Nostro accounts) are not foreign exchange and that the said banks were deactivating the use of international debit or credit cards such as MasterCard should be disregarded,” Mangudya said.

He described the statements as uncalled for as “they do not represent the true state of the foreign exchange liquidity position in the economy”.

“The Bank [RBZ] has noted that FBC Bank Limited and BancABC Limited, banks cited as having advised the public that they were deactivating card services, have since issued statements distancing themselves from the statements circulating on social media,” Mangudya said.

The Bankers Association of Zimbabwe (BAZ) chief executive officer Fanwell Mutogo warned against relying on  social media statements.

“The issues raised in the social corridors were not genuine, and as such, the central bank and some member banks released press statements to that effect. We encourage the public not to rely entirely on social media but to seek information from authentic sources,” Mutogo said.

It is understood that the actual physical US$ cash in the formal banking sector has gone down to US$457m in March 2023 from US$539m in March 2022 with the decline in the cash of US$82m being replaced by an increase in cash held offshore of approximately US$80m.

BAZ said one of its strategic objectives was to improve stakeholder perceptions about the banking sector by proactively articulating and clarifying issues that circulate on social media.

“From where we are, we have seen a significant improvement in deposits (both ZW$L and US$) from the previous years i.e. 2009 (dollarisation era) to now, which signifies an improvement in perception as well,” Mutogo said.

 

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