Zimbabwe’s descent towards economic ruin has been widely reported – the economy shrank by 13.7% and 13.2% respectively in 2002 and 2003; foreign exchange reserves were down to just US$10m by the end of last year (worth just 0.1 months of import cover); inflation is running at around 600% and up to seven million Zimbabweans will this year need food aid or face hunger.
But such all-too-familiar tales of woe have obscured a gripping sideshow in the Zimbabwean saga. Towards the end of last year the country’s banking system came perilously close to meltdown, was rescued with timely but tough intervention from the Reserve Bank of Zimbabwe (RBZ), and now faces a wave of consolidation. As if that was not enough, the man behind the sector’s rescue, RBZ governor Gideon Gono, has had to endure death threats from unknown enemies on the receiving end of his efforts to sort the problem out.
Root of problem
The now infamous, government-sanctioned land seizures of white-owned commercial farm land by so-called war veterans was the start of things, having a direct impact on the output of tobacco – Zimbabwe’s biggest foreign exchange earner – as well as severely denting confidence. Tobacco production fell from 236,700 tonnes in 2000 to around 80,000 tonnes in 2003.
This had a number of consequences. The sudden sharp decrease in foreign exchange earnings combined with a fixed exchange rate policy led to the creation of a parallel black market for currency, where almost all foreign exchange transactions were conducted. Black market rates peaked at over Zim$6000 to the US dollar compared with official rates of Zim$800/US$.
This lit the fire of inflation. The cost of imported inputs soared, which together with a severe loss of confidence, led to cuts in output across the economy and rising prices. The land seizures also hit food production, triggering shortages and price hikes.
Tax revenues plummeted but government spending was not trimmed to match, leading to a deficit of over 7% of gross domestic product last year and as high as 23% in 2000.
In this hyper-inflationary environment, instead of raising interests rates, the RBZ kept them low, resulting in sharply negative real interest rates. At the end of November last year interest rates were around 100% against a rate of inflation close to 620%. This triggered an asset acquisition binge, with Zimbabweans borrowing to buy real estate, motor vehicles, equities and goods that they could resell at a profit later when prices rose in line with already booming inflation.
Aggressive lending caused problems at the daily inter-bank clearing, with some institutions experiencing frequent liquidity problems. Compounding this was the unregulated and largely uncontrolled mushrooming of the asset management industry, offering higher returns than banks as they were not subject to similar statutory controls. This in turn eroded the banks’ deposit bases and pushed them closer to a liquidity crunch.
The RBZ responded by meeting the sector’s daily liquidity requirements with cheap money. Money supply growth soared and inflation bolted.
Mr Gono was appointed in early December last year, and he quickly signalled that easy access to central bank resources to fund inappropriate activities was a thing of the past. Overnight interbank rates rose, at one stage as high as 900%, signalling a return to positive real interest rates. Passing on higher interest rates to customers meant many borrowers were unable to meet interest obligations, rendering banks’ already questionable balance sheets precarious. “Spot inspections will be conducted to establish the underlying causes of the bank’s asset-liability mismatch. Where persistent and serious managerial deficiencies are detected, the banks concerned will be directed to restructure their top management and treasury operations, and if the situation persists, the Reserve Bank will insist on restructuring of their board as a condition for accessing the liquidity support facility,” Mr Gono warned at the time.
The RBZ’s intervention uncovered not just imprudent lending activities by certain banks but large-scale fraud as well. Though certain senior executives were forced out – coinciding with the threats to Mr Gono’s safety – the RBZ governor was faced with a quandary. His necessary but tough actions had brought the banking sector to the brink of a crisis of confidence, threatening a systemic meltdown.
Conditional help
At one point, six banks – Trust Bank, Agribank, Time Bank, Barbican Bank, Century Bank and Metropolitan Bank – were suspended from daily clearing. And retailers were refusing to accept cheques from some banks. Confidence in the sector was at risk of evaporating all together, threatening a run on deposits. Finally, Mr Gono was compelled to act by establishing a Troubled Banks Fund and injecting capital into distressed banks. It bought time for the offending institutions but was conditional on far-reaching restructuring and the cost of this capital was punitive.
Mr Gono’s intervention has restored a measure of reason to a bizarre situation. For the six months to June 30, 2003, financial group Trust Holdings Ltd announced a profit after tax of Zim$15.1bn. This was an increase of 150% over the group’s performance for the entire 2002 financial year and profits were up 817% compared with the same period the previous year, .
High-risk strategy
A generous dividend was declared and Trust Holdings embarked on a rapid diversification strategy, ballooning in size to become one of the country’s largest financial institutions. In all, the group’s asset base grew tenfold in size to Zim$800bn in just one year.
In reality, however, Trust Holdings was frequently experiencing short-term liquidity problems requiring an RBZ bailout. Given its size, Trust posed an enormous risk to the entire sector.
At Barclays Bank of Zimbabwe, managing director Alex Jongwe was taken to task by shareholders for the bank’s static share price. Barclays was not producing the stratospheric profit growth – but, as a clearer picture of the sector emerged, it became obvious that neither was it sacrificing its balance sheet. Since customers have got wind of the problems in the sector there has been a flight to quality, with Barclays, Standard Chartered, Kingdom, Merchant Bank of Central Africa and Jewell Bank all seeing a surge in deposits.
Despite Mr Gono’s tough intervention, the situation is far from resolved. On March 31 (after this article went to print), the RBZ was intending to withdraw liquidity support to distressed banks under its Troubled Bank Fund programme. It plunges the sector into further uncertainty with question marks over the sustainability of those banks that received support.
The RBZ has imposed far-reaching restructuring on offending institutions, including Trust Holdings. Whether this is enough to ensure banks’ survival is unknown but observers expect a round of consolidation in the industry. “2004 will be marked by bank mergers, reorganisations and failures or closures in Zimbabwe. By the end of the year there will not be as many banks in the sector but in the long term this will lead to a stronger sector,” says Dave King, chairman of Global Credit Ratings Co, a South African-based rating agency.
Political hopes low
The longer-term health of the banking sector depends on normalisation of the broader political and social environment. Hopes for a political solution are, however, dim. President Robert Mugabe rebuffed talk of compromise with the opposition Movement for Democratic Change, despite widening sanctions by the US, European Union and Australia and a stinging rebuke from US president George W Bush. Pressure from within Africa is uncoordinated at best, seemingly sympathetic to him at other times. The “quiet diplomacy” of South African president Thabo Mbeki has yielded little and there are no signs that he is planning a heavier-handed approach.
Most analysts agree that without political change there can be no meaningful improvement in conditions. Inward foreign exchange flows must be restored and the productive sectors of the economy must recover – neither of which is likely if Mr Mugabe stays in power or fails to make at least some concessions to his critics.
Ongoing problems
Now commercial farmers have been moved off the land and replaced by under-skilled and under-capitalised new farmers, there is little expectation that Zimbabwe’s agricultural output will recover soon, meaning no improvement to the foreign exchange shortfall and ongoing food shortages. This in turn will continue to fan inflationary pressures, both in terms of the rising price of imported goods (as the currency continues to deteriorate) and the demand-pull impact of food scarcity.
With the International Monetary Fund holding its line of no new credit to Zimbabwe, Mr Gono has very few policy options at his disposal to improve the currency and restore macroeconomic stability. Such instability, combined with a pervasive mood of uncertainty and pessimism, will continue to hit the country’s other productive sectors, plunging the economy deeper into ruin.
Mr Gono, a loyalist of President Robert Mugabe’s Zanu PF party, defied his critics and dispensed the bitter medicine that the banking sector needed, earning respect for his approach in the process. Even then, his target to slow inflation to under 200% this year and into double digits by the end of next year seems unlikely.
