ZIMBABWE’S banks are sitting on US$1.7 billion and not willing to lend it to corporates due to the uncertainty around currency reforms which exposes them if they issue United States dollar-denominated loans, The NewsHawks has learnt.
Whilst the foreign exchange auction system (FEAS) is in dire need of US dollar liquidity, Treasury recently revealed that US$1.7 billion was lying idle in banks.
“This not only points to an ‘incomplete market,’ but exposes the weaknesses of the FEAS as a forex market. It also showcases the knock-on effects of the legacy challenges broadly reflected by the lack of market confidence,” the Zimbabwe Coalition on Debt and Development (Zimcodd), a social justice advocacy organisation, said.
Bids worth US$200 million remain unpaid–pointing to the illiquidity of the FEAS. By design, the FEAS is supposed to provide fair and predictable access to forex for corporates. Compulsory surrender requirements on export earnings and local US dollar sales partly finance the FEAS.
“This explains the understatement of export returns as well as the smuggling of minerals as a way of limiting losses associated with formal reporting of exports. Although the Treasury secretary would have anticipated banks to lend US dollars to corporate entities, the uncertainty around currency reforms exposes banks if they issue out US dollar-denominated loans,” Zimcodd said.
“Legacy issues around the government’s tendency of turn-coat currency reforms have undermined overall confidence in the local banking sector. That explains why most of the US dollars are unbanked whilst the banked US dollars are largely transitory. Ideally, banks keep the US dollar deposits to meet call demand by clients.”
Last year, President Emmerson Mnangagwa’s administration promulgated a record 300 Statutory Instruments (SIs) and, in the process, violated laid down procedures on most of the subsidiary laws.
This year, the government has also gazetted a couple of SIs with the latest being the controversial SI 127 of 2021.
The new law triggered massive price hikes for most goods and services in the country.
Finance minister Mthuli Ncube defended the government’s repeated promulgation of SIs as a way of addressing multiple economic and political challenges facing the country.
All the same, Zimcodd said the central bank no longer plays the role of lender of last resort with respect to foreign currency, thus any US dollar exposure requires banks to seek other avenues of closing such gaps, which might not be tenable.
“From a credit risk perspective, few corporates record viable USD sales – making it untenable for banks to extend US$ loans. For better availability of forex on the markets, the government must disband the FEAS and adopt a market-oriented market, invest in building confidence in the financial sector, stamp out corruption and make sound currency reforms to safeguard the integrity of the country’s banking and financial sector,” it said.
Stevenson Dhlamini, an applied economics lecturer at the National University of Science and Technology, said: “We need to see the banks beginning to lend to firms because they are currently sitting on about 50% of their deposits that are forex, but they are not extending loans and that’s not good or healthy for an economy.”
“So we expect the government to create incentives for our financial sector as well to start playing its role of credit creation in the economy,” he said.