Harare – If there is anything that we could learn from the global economic crisis of 2008, it is that excessive risk taking, manipulation and poor hedging often result in huge enterprise and economic losses. The famous subprime mortgage induced downfall of The Lehman Brothers in the US.
Ambitious investments by Oppenheimer in Germany, among many other banks, and the weighing effect it had on the overall financial sector, the respective economies and the global economy at large, can indeed be referred to in the quest to analyse and understand the threatening financial and economic crises in Zimbabwe. But we have walked this road not so long before. Ordinary Zimbabweans still feel the pain of yesteryear economic mismanagement and short-termism.
At present, Zimbabwe faces a prolonged and worsening cash crisis, inflationary pressures and wider exchange rate disparities between the US dollar and the local equivalents. Cash withdrawals have sharply come off in line with cash unavailability both in bond notes and coins and US dollars.
The prices of goods and services is going up in response to a growth in demand and the menacing impact of depleting exchange rates. The spiking exchange rates now risk completely wiping off the value of RTGS sitting at local banks. These challenges have militated to shake the economy right to the nucleus.
But evidently, these outcomes are manifestations of underlying structural problems within the fiscus body of the economy, which in turn gullible financial institutions have aimed at exploiting without proper risk assessment.
Zimbabwe’s fiscus body ails from a critical over-expenditure syndrome and without support from outside in the form of budgetary aid and external lines of credit, could only be quenched or satiated through domestic borrowings.
This is what British Economist referred to in his behavioural economic analysis as an inherent “defective telescopic faculty” which makes people too short sighted to give adequate weight to the future.
For lack of better word, he charged that a bird in hand point of view leads people to spend too much on today’s consumption at the expense of the future. It is sad, as in Zimbabwe’s case, when the future never seems so distant.
A successive sharp growth in government’s domestic debt, which since 2014 has doubled up, is a clear demonstration of this insensibility. Government’s total domestic and foreign debt is now equivalent to 80% of GDP which is unprecedented and unsustainable. In-fact, expensive and mainly short-term local debt has outpaced long term and cheap external debt, which implies higher interest payments on the short end and further pressure on money supply as will be demonstrated later in this piece.
Since 2014 the budget deficit gap has been widening even as national income was improving, which only saves to show that government expenditure was rising at a relatively higher level. To clearly demonstrate that revenues collected were not the source of the problem, we look at the average tax revenue to GDP which between 2014 and 2017 stood at 19% against the regional average of 20.5%.
So, in essence, the government was sweating enough out of the national produce as tax receipts performed in line with the region.
However, a look at the fiscal deficit to GDP ratio points to reckless national consumption. This ratio represents the budget deficit as a percentage of GDP and using 2017 numbers a ratio of 17% was attained against a sustainable 5% rate.
So all these different economic matrices help demonstrate shortcomings on the fiscal end of the economy, deliberately created by the central government, which in turn has been the major source of the unfolding crisis in Zimbabwe.
As has become common knowledge, it is treasury bills, sovereign security instruments, which were used to borrow money through open market operations and the major participants were banks and pension funds. Banks thus utilized deposits whose significant component is customer deposits to fund treasury bills. This did not only crowd out private sector lending, but effectively eroded deposits value through money supply growth.
The money which banks were utilizing to fund TBs was real money in the form of USD, bond notes and coins and in turn swapped this for government’s treasury paper which came at attractive interest and discounts. As government issued more treasury bills coming from $200 million to $7.6 billion between 2014 and 2018, banks accumulated more of these toxic assets attracting huge interest and cashing in on steep discounts, in turn fuelling credit creation in the economy.
This resulted in the erosion of real money balance when compared to the overall money in the economy. Real cash, which is notes and coins either USD or bonds, now stands at only 4.5% as a ratio of total money in the banking system given that deposits are now at $10 billion.
But why were banks buying this toxic paper, if its near term impact was so clear? It was very clear that an asset with a beta of zero cannot attract discounts of up to 50%. But 80% of all banks in Zimbabwe could not resist the steep discount which they immediately recognized as earnings on valuing the asset to parity.
This was fiction and robbery combined all executed in broad day light. So, the equation is clear, banks robbed customers their hard cash deposits and extended to government as debt which in turn gave back a piece of valueless but brightly painted paper as security.
When depositors started demanding their money, banks failed to honour up and the rest is history. Who then is liable the banks or the government? In my view, banks are more liable than government since they are the ones who had the mandate to protect the depositor through prudential allocations via different investment asset classes.
But here is the crux of the matter: Banks know a certain truth, the truth that they have invested in a sub-standard asset class, but also that government, as the accomplice debtor and the regulator through RBZ, is less likely to reprimand them. Banks have always been aware that government has no capacity to repay by merely looking at the ratio of domestic debt to tax revenue.
But will government default? Banks think otherwise, but at this point it is more prudential for government to default on its interest payments and re-equilibrate the market. With a growing money supply, fuelled by debt repayments, the market disparities keep widening and with it the parallel exchange rates and inflation which both have depleting effect on the value of RTGS.
The choices are therefore narrow; it is either Zimbabwe demonetizes again, or government defaults. If Zimbabwe takes the demonetization route, ordinary citizens who do not have an idea of how sweet TBs coupons tastes, will be the major loser. Trust between the authorities, banks and ordinary citizens will erode to an even new low, such that banking in Zimbabwe will become a nightmare.
A mere look at the $10 billion in RTGS will show us something profound. Who owns what? Only $1 billion is attributed to individual customers about double that amount is due to corporates and the difference of close to $6.5 billion is attributed to banks and pension funds.
How did they earn that much of RTGS? Through TBs primarily funded by depositors’ money. Who benefited? Bank executives, board members and shareholders, and likewise, the pension funds.
So, clearly it is not wise to punish the depositor for the wrong investment decisions made by the bank. It is also not prudent for government to keep paying a premium through holding exchange rate parity when value is in disparity and pressure is mounting.
It becomes wiser and mitigating if government is to default. Doing so is an acknowledgement of the unsustainability of the mode of borrowing, it impacts positively on confidence if properly communicated.
On the other hand, some banks will have to go under. Banks which have been more aggressive on TBs will likely fold. But is it nearly the entire sector?
Yes, it is. A good number will have to fold as a way of setting precedence and promoting good practices in local banking for future’s sake, of course, some will have to be bailed out. This is critical in preserving monetary value especially for individuals and some corporates.
It is also critical in improving confidence in the banking sector. Lastly, it spares the fiscus from its current nightmare, where a good fraction of its resources are now being channelled towards debt repayment.
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