31 July 2012

Zimbabwe: RBZ Acts On Bank Debt

THE Reserve Bank of Zimbabwe has made a US$1,3 million payment to banks in settlement of outstanding statutory reserve balances. The payment forms part of initial steps towards clearing a total of US$83,4 million the central bank owed as at March 31 this year.

The balances were converted into Government stock and attracted interest of between 2,5 and 3,5 percent and tenure of up to four years.

RBZ Governor Dr Gideon Gono recently said the development is an effective precursor to anticipated improved activity on the interbank market.

"The first coupon payment of US$1,268 million was effected on 2 July 2012. In that respect, we are grateful to the Government for ensuring performance as this promotes market confidence.

"This development will ensure support for any future issues of Government instruments," he said.

Dr Gono was addressing delegates attending the Confederation of Zimbabwe Industries annual congress in Nyanga last week.

"In addition, banks may be prepared to start using these instruments as collateral or start trading them thus reactivating the interbank market."

The coupon payment system represents the first major development towards a deliberate strategy to reignite activity on the interbank market.

The absence of money market instruments, in the form of Government paper, has affected the smooth functioning of the interbank market.

Banks and market participants could not trade without suitable and acceptable collateral to hedge against potential counter-party risks.

Introduction of the Government paper is expected to assist in improving the liquidity challenges facing banks and the economy in general.

Dr Gono commended Finance Minister Tendai Biti for announcing plans to issue the Government-backed financial instruments on to the market.

"We commend the Honourable Minister of Finance for his Mid-Term Fiscal Review Statement in which he announced that Government shall issue instruments to the market.

"The re-introduction of these instruments will resuscitate the country's money market and unlock as well as broaden liquidity, away from its current narrow definition of cash.

"The re-introduction of these instruments will resuscitate the country's money market and unlock as well as broaden liquidity, away from its current narrow definition of cash."

The Monetary Policy Review Statement, which is due this week, is expected to give further direction on the plans to issue the Government-backed paper.

These securities is also expected to ease Government cash flow challenges through the issuance of paper when Government revenues are low.

Analysts believe that even a nominal amount of, say, US$10 million could guide the financial market on the interest rate structure.

Lending rates being quoted by banks remain very high due to the liquidity shortages, high credit demand, high associated risks, limited lines of credit and the absence of an active money market.

Figures from the RBZ show that nominal lending rates quoted by banks range from 8 percent to 30 percent with a weighted average lending rate of between 14 percent and 20 percent during the last four months.

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