<vote /> A reader in The Herald recently commented on an article citing a possible reason why the country is facing the current cash crisis.
Herewith a possible explanation:
You would like a solution? Here is a solution, in fact the only solution:
It is now obvious that the largest single cause of the banknote shortage in Zimbabwe at the moment is because the RBZ has been creating 'virtual Dollars' in the RTGS system that isn't backed by real cash that the apex bank possesses as assets: cash at hand, local or nostro deposits or other quality assets such as loans that are generating interest income and not in arrears. I don't count loans from the RBZ to the Government as 'quality assets', for obvious reasons! Cash is cash, either in local bank vaults or in nostro accounts overseas. Quality assets are bankable. That is, if a bank needs to raise cash it can borrow against its loan portfolio.
The way banking is supposed to work is if you deposit money money in a bank the bank holds that money on their books either as 1) cash; 2) a deposit in a foreign nostro account; 3) an asset in the form of a loan to someone else; or 4) a deposit at the Reserve Bank.
If it's #1, if you want to withdraw your cash then that should be no problem. if it's #2 then there might be a delay while the bank withdraws the money from the nostro account and has it sent to Zimbabwe. #3 can cause liquidity problems but a quality loan portfolio is bankable, if a bank needs cash it can borrow against this bankable asset. Lastly, #4 is the reason why money people think they have in their accounts cannot be withdrawn. Because this money exists only as an accounting entry in the RBZ's RTGS system, it doesn't exist as real money in the form of #1, #2, or #3.
Everyone understands Zimbabwe cannot print US dollars but that fact doesn’t prevent the RBZ from creating money by creating entries in the RTGS system that it manages (or fraudulently mismanages as the case may be.)
How did this happen?
The government of Zimbabwe has been funding its budget deficits by issuing Treasury Bills, thereby mopping up liquidity. Real money that people place in the banks is given by the banks to the government in return for paper called Treasury Bills. As the regulator of commercial banks, the RBZ can direct the banks as to how much money they must 'invest' in Treasury Bonds and also how much they must deposit with the RBZ. (This is common practice around the world, but only in Zimbabwe is it so blatantly abused.) These Treasury Bills will have varying maturity dates so that they don’t all become due for payment all at once, something that would potentially bankrupt even the most frugal and competent government.
The Treasury Bills that have matured need to be paid, except of course government doesn’t have the money. That’s no secret. So the government instructs the RBZ to credit the RTGS accounts of the banks that owned the Treasury Bills the money they are owed. The banks gave government real cash for the Treasury Bills but now the government gives the banks 'virtual Dollars' back.
In theory, in order to credit the commercial banks’ RTGS accounts the RBZ would need to debit their own RTGS account at the same time. For this to work properly the RBZ should have been holding physical cash or US Dollars in nostro accounts for the equivalent of what it is crediting the commercial banks, funds that effectively become the property of the banks.
But, of course, we come back to the fact the government is broke. So the RBZ has in fact been crediting the commercial banks RTGS accounts with US Dollars it does not have.
This is not a problem if the banks, or their customers, want to pay the money they think they have in the RTGS system to another account at another bank within the same RTGS system. The 'virtual Dollars' simply gets transferred from one to the other without anyone noticing it’s not there.
It is only a problem when and if the banks, or their customers, want to see their cash or pay someone outside Zimbabwe with that cash.
Making payments to other countries is particularly illustrative and troubling, so let’s look at this in greater detail.
A businessman has $5,000 in his Barclays bank account and needs to pay for supplies from abroad. He goes to BBZ with an instruction to pay XYZ Pte Ltd in Singapore that $5,000 on his behalf. BBZ doesn’t have his $5,000, what they do have is a $5,000 credit with the RBZ, so BBZ instructs the RBZ to pay XYZ Pte Ltd that $5,000 on their behalf. But the RBZ, even though it has said it has the money in a nostro account to cover the money it owes BBZ, money that belongs to the businessman, doesn’t actually have it. It’s spent the cash, or didn’t have the cash to begin with.
Now, Professor, I hope you understand what ‘cannot make international payments due to depleted nostro accounts’ actually means. The RBZ's solution is the 'foreign exchange priority list' by which it specifies whose and which external payments are processed and which aren't. Priority is given to essential strategic imports: electricity, food, fuel, etc. but curiously looking at a certain larger than life (or just large) bigwig's Instagram, his foreign purchases also apparently come under this category.
Same thing with physical US Dollars. If the BBZ customer wants to withdraw his US Dollars, BBZ will ask the RBZ and the RBZ will check its nostro accounts. If there’s money there the RBZ will instruct the correspondent bank where the money is held to withdraw the money and send it to BBZ to give to the customer. If there’s no money there then US Dollars can’t be withdrawn. If there’s only a little money there then withdrawal limits are imposed by the RBZ.
Recently this paper reported: 'The apex bank has also secured $200 million from Afreximbank to ease pressure on nostro accounts, which are used to make payments for purchases in foreign countries.' No one knows is this is the same $200 million that will supposedly back the bond notes, if so then the RBZ is engaging in yet more double counting. Dr Mangudya might need reminding that while he can create multiple accounting entries for this magic $200 million, he can only spend the real cash once. Considering businesses in strategic sectors like mining are still having trouble making external payments for the most essential inputs, maybe the $200 million Afreximbank is already spent?
Tha RBZ is trying to manage the problem by instructing commercial banks to transfer to it (the RBZ) 80% of money coming in from exports. The exporters get 20% of the value they export and a ‘credit’ at the RBZ for the other 80%. Instead of holding the 80% locked away in a nostro account safely for the exporter, the RBZ is using the money to make some of those external payments that are held up due to 'depleted nostro accounts'. It's even worse for the miners who must have 100% of their foreign earnings placed in the RBZ's nostro accounts.
In terms of local cash withdrawls the RBZ also has solution: having created 'virtual Dollars', now the RBZ needs to create a physical form of it. It can’t print US Dollars so it prints bond notes. In Zimbabwe: plus ça change, plus c’est la même chose.
And now the solution: rather than 'manage' the problem with withdrawal limits, appropriating exporters incomes, 'foreign exchange priority list', etc. we need a forensic audit of the missing millions and billions that we are told exists in the banking system that obviously are not actually there. Once we have quantified how 'virtual cash' exists on paper and computer screens that is not backed up by 1) hard cash; 2) deposits in foreign nostro accounts; or 3) bankable assets in the form of quality loans, then we can seek support in the form of a loan from one of our all weather friends to inject real cash to support the book entries. I will be a huge loan, so it will be a big favour to ask, but that is the only way possible to get the banking system back on steady ground. The next imperative would then be to ensure nothing like 'virtual cash' accounting can ever happen again in the Zimbabwean banking system.
For the full article on Herald click here.
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