Banks turn to US$ lending

(Last Updated On: November 17, 2022)

LIVINGSTONE MARUFU

 

Farmers who demonstrate capacity to get hard currency from their produce can now borrow in US$, banks say.

This however, comes amid fears that the current liquidity squeeze could affect local currency borrowers.

The Reserve Bank of Zimbabwe  (RBZ) took an unprecedented decision to suck out liquidity in the market and the move has caused subdued lending in ZWL$ resulting in truncated credit expansion.

Bankers Association of Zimbabwe chief executive officer Fanwell Mutogo told Business Times that there is always another way to ensure the agriculture business remains resolute.

“Confirmed current liquidity conditions will curtail ZWL$ lending but farmers have the option to borrow in US$ where they demonstrate that they will get foreign currency for their produce. Recent producer prices which are pegged in US$ will help,” he said.

“Also the traditional US$-earning crops like tobacco and exporters will as usual get funding in hard currency,” Mutogo said.

“The current tight liquidity conditions are not extreme enough to affect credit performance. However, the challenge is to maintain a balance in the outlook so that the liquidity conditions don’t get tighter.”

The central bank rattled the agriculture sector after its deliberate action to regulate the quantity of money in circulation. This left many banks with limited resources to fund the sector.

In a third-quarter trading update, First Capital Bank’s acting company secretary Sarudzai Binha said the current situation could affect lending in a big way.

“The tight liquidity in the market may present downside risk on credit performance as borrower capacity to carry related costs is strained.

“…the situation could also affect credit expansion,” she said.

Recently, First Capital Bank managing director, Ciaran McSharry said the tenuous operating environment projects an outlook that does not favour balance sheet expansion for banks.

“With the Zimbabwe dollar liquidity on the market having been largely constrained, the bank has experienced a notable shift in its operating environment with foreign-denominated business becoming increasingly prominent,” McSharry said.

As a result, First Capital Bank recorded an increase in foreign-denominated earnings to 40% of total income for the quarter from 22% in the first quarter due to the RBZ policy measures which encourage clients to deposit US$.

Experts warned that a tight monetary policy stance could accelerate dollarisation.

Market analysts say the liquidity squeeze could weigh on aggregate demand, levels of production, and asset values resulting in some operators failing to fund their businesses as well as capital needs.

Zimbabwe was experiencing the sharpest and most prolonged resurgence of inflation since July 2020 when it peaked at 837%.

The RBZ expanded its monetary measures, tightening the money supply and curtailing speculative activities to rein in runaway inflation.

The central bank recently increased the interest rates to 200% from 80% as it moved to curtail speculative borrowing, blamed for fuelling parallel market.

Also, RBZ introduced gold coins which mopped out over ZWL$10bn in the economy.

This week, RBZ also introduced smaller denominated gold coins for the general public.

The Ministry of Finance and Economic Development also suspended payments to government contractors as part of efforts to halt a slump in the local currency which is fuelling hyperinflation.

This saw the country’s annual consumer price inflation eased for the second straight month to 268.8% in October of 2022, from 280.4% in the prior month following tight monetary measures implemented by the government and monetary authorities.

 

 

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