Banks in liquidity balance push

LIVINGSTONE MARUFU

Banks and the industry are pushing for the government to strike a balance in liquidity management amid fears that the current squeeze could paralyse the economy as financial institutions run dry.

On Tuesday, foreign currency bidders only accessed  just above US$500,000  from the benchmark of US$5m per week.

Banks and industrialists agree that this will certainly hurt the economy and bring unintended consequences.

Bankers Association of Zimbabwe (BAZ) chief executive officer Fanwell Mutogo told Business Times that  the ZWL$ liquidity should be kept at an equilibrium  level.

“Liquidity management is essential, but the challenge is to find a balance to keep the economy running. Yes, we can confirm that ZWL$ liquidity is tight at the moment, however banks buy forex based on client’s demand and what it means is that the tight liquidity situation is also affecting companies that buy forex through banks,” Mutogo said.

“We understand  the government’s position as regards the liquidity measures which have been implemented given what was happening in the economy, however, we believe the current tight liquidity situation is an unintended consequence of the measures.”

The call by banks  comes as the Confederation of Zimbabwe Industries (CZI) in its latest report  said the businesses will suffer if there is no liquidity balance in the economy.

“This [tight liquidity] is expected to foster demand for the local currency and is in line with the calls from CZI over the years for the need to balance between supply side and demand side measures.

“Although currently the ZWL$ has been mopped out to leave industry starved of the ZWL$, it is expected that the authorities will take this as a way to have an idea about the actual ZWL$ levels that are optimal for the market.

“Excess ZWL$ will cause an exchange rate depreciation while a market starved of ZWL$ might also entrench dollarisation and retard growth. It is expected that the authorities will work out an optimal balance soon,” CZI said.

Despite the banks and industry calls, authorities  vow to maintain the  recently announced  tight monetary and fiscal measures  to stabilise the economy.

The government’s bullish sentiments comes after the Zimbabwe dollar exchange rate gained ground against the United States dollar  in the past three weeks on all fronts as local currency liquidity continues to tighten across the economy amid a raft of economic stabilisation measures rolled out.

In May the ZWL plummeted to its lowest  levels  since  the return of the ZWL$ prompting the government to  implement a cocktail of measures authorities including the mopping up of the ZWL$  liquidity in the market to halt the rampant parallel market  exchange rate, the major driver of local inflation resulting in price stability in the formal market.

After yesterday’s wholesale auction, the exchange rate strengthened to ZWL$5395.9619 per US$1 from  ZWL$6 926.57/US$1 at fortnight’s central bank wholesale auction where banks purchase forex for onward sale to their clients.

Economic analysts have doubted the stability  and described it as “artificial”.

But Finance and Economic Development deputy minister Clemence Chiduwa told Business Times that the government prioritises inflation and exchange stability culminating into price stability ahead of the election and will not loosen its purse.

“We are going to stay the course and maintain tight monetary and fiscal measures to ensure there is stability. Those who are holding on to their US$ anticipating that the government will  take a nap and loosen the purse, we are not going to do that any time soon.

“We need to ensure that those who earn the ZWL$  can be able to use it without fear or rush,” Chiduwa said.

He said over ZWL$300bn has been mopped up in the economy since a raft of measures were implemented.

“We have sucked ZWL$ liquidity to the extent that some employers and some players failed to settle their obligations in ZWL$ and released the US$ to pay their responsibilities,” Chiduwa said.

The development comes at a time when bidders only managed to  get US$580 921.57 on the auction, showing that there is a liquidity squeeze in the market.

The Reserve Bank of Zimbabwe governor John Mangudya  said the government will do whatever it takes to ensure stability in the market.

“We will maintain the tight policy stances  because we believe that this economy is about sentiments and perception therefore we are staying the course,” Mangudya said.

The central bank chief’s  remarks come as the businesses have warned that a tight policy stance would derail economic growth as it restricts lending to productive sectors of the economy.

Mangudya was adamant there won’t be any reversal of policy warning a “few unscrupulous dealers” resisting the policy measures that they would be dealt with.

CZI said the full impact of the measures, especially in terms of inflation stability, will be felt in July 2023 inflation numbers if the government stays the course and fully implements the measures.

In addition to those measures, the Treasury has instructed companies to pay 50% of their foreign currency Quarterly Payment Date (QPD) for June 2023 in local currency.

This is expected to foster demand for the local currency.

Government  said it has not accepted payment in US$ or any other currency for the portion of corporate income tax due in local currency for the June tax QPD.

The authorities promised to penalise vigorously for all late payments of the June 2023 QPD tax obligations.

Despite the recent stability,  market analysts believe the country will  falter soon.

“We may have stability for a short term but exchange rate challenges may soon pop up as the economic fundamentals are not in place.

“Also, the fact that the country does have significant foreign currency reserves, means that there will always be a high demand for forex for both businesses and individuals,” Mark & Associates insights  and research director said yesterday.

Also, recently brokerage firm  IH Securities noted that key risks to estimates are possible spill-over effects from global events and perceived confidence levels as the country heads towards general elections.