Beware of the black market
While monetary authorities have good intentions in trying to reduce interest rates to promote borrowing by firms so as to enhance production, they should be wary of creating another monster that they will be unable to tame — the black market.
HOWDY folks! The Reserve Bank of Zimbabwe has a crucial role of ensuring economic stability in general and financial stability in particular.
The monetary policy is one of the key policies that comes up with the necessary interventions aimed at stimulating aggregate demand, money supply, interest rates, credit and other variables.
The efficacy of the interventions can be understood through the monetary policy transmission, which is a process through which monetary policy decisions impact the economy in general.
It largely looks at how the decisions of the monetary policy move from paper into physical force, and how they are felt by economic agents.
But that may not be realised immediately after the monetary policy has been announced, as in this case.
It is, however, important to understand the probable impact of the main measures in terms of dealing with the major challenges of the day.
The central bank should be applauded for trying to speak to the main problems that this economy is facing.
Most players in the productive sectors have been calling for concrete supply side measures.
Those in manufacturing, for example, were no longer able to import critical raw materials in time due to delays in settlements of their payments abroad, which affects production and supply cycles.
While Government last year instituted measures to channel more demand for local products by controlling imports, the move saw many firms increasing their operating capacities dynamically.
However, as more goods are produced, more raw materials and equipment are needed, and more foreign currency should be readily available to meet that purpose.
The central bank announced a US$70 million Nostro stabilisation facility to deal with delays in processing outgoing payments for the procurement of productive imports.
Zimbabwe’s monthly imports average US$400 million and capital goods imports alone account for about US$60 million per month, while fuels and lubricants account for about US$100 million per month.
It is hoped that this facility will be adequate to augment the Nostro balances and effectively launch the economy in the direction of its priorities.
Monetary authorities envisage “enhancing production and productivity across the board”, and should reflect this in the manner in which they allocate facilities to foster balanced and sustainable growth.
Out of the 247 facilities valued at US$1,8 billion that the central bank approved and registered last year, other productive sectors such as construction received a paltry US$7,5 million, with manufacturing getting US$52,6 million.
This is despite the fact that these sectors play a major role in the value-addition agenda.
Banks’ appetite to loan has also substantially declined, as can be seen from the fall in the loan-to-deposit ratio from 86,07 percent in December 2015 to 56,64 percent in December 2016.
This was despite the fact that banking sector deposits increased from US$5,62 billion to US$6.51 billion over the same period.
Banking sector loans declined from US$3,872.4 billion in December 2015 to US$3,688.5 billion in December 2016.
This means banks might be missing out on income-generating opportunities or are not confident enough to lend.
It also means they are probably not adequately incentivised by returns from loaning.
Banks are traditionally supposed to sustain a loan-to-deposit ratio of up to 85 percent, meaning there is room to unlock about US$1,845 billion in loans to the starving market.
However, this will be determined by the nature of deposits.
A lower loan-to-deposit ratio can also imply that banks have resources to channel towards more lucrative opportunities that may arise in the future and that they have enough liquidity to cover any unforeseen requirements.
In light of the above, is it really appropriate for the RBZ to command all banks to reduce lending rates to 12 percent with effect from April Fools’ Day?
Won’t banks start to consider the opportunity cost of lending more intently or further tighten screws on lending, resulting in the loan-to-deposit ratio shrinking further?
If banks are reluctant to increase loan-to-deposit ratios when lending rates are as high as 18 percent, how much more when the rates are capped to 12 percent, and then they are further forced to increase interest on deposits?
This also comes at a time when the American Federal Reserve has announced that it will increase interest rates at its upcoming meetings this year.
In 2016, the Federal Reserve also announced that it will effect three interest rate increases this year.
All this puts upward pressure on local lending rates and eats into bank profit margins.
While monetary authorities have good intentions in trying to reduce interest rates to promote borrowing by firms so as to enhance production, they should be wary of creating another monster that they will be unable to tame — the black market.
This enclave is already thriving and banks should not be tempted to join hands with the black market as was the case in the 2007-8 era.
Some individuals on the black market are selling cash at a premium of between 15 to 25 percent, and questions have been asked regarding where these characters always get loads of cash everyday when others are failing to get it.
The monetary policy, to a greater extent, did not come up with concrete measures to deal with the parallel market offering financial products.
Given the many controls that the RBZ announced, it is prudent to anticipate the emergence of a black market and to put the necessary checks and balances in place.
Later folks!