A senior executive of the Commercial Bank of Zimbabwe, where central bank governor Gideon Gono served was chief executive officer before moving to the central bank, said Gono had set the foreign exchange withdrawal ceiling too high probably to allow ZANU-PF cronies to move large amounts of money out of the country easily but to the detriment of the banking sector.
The executive who was not named was commenting on the state of the banking sector after Gono’s monetary policy statement in which he liberalised the foreign exchange market.
Gono lifted the withdrawal limits by individuals and said residents could take out up to US$250 000 in cash without any questions. Previously the withdrawal limit had been US$5 000.
Full cable:
Viewing cable 09HARARE118, ZIMBABWE’S BANKING SECTOR NOT YET OUT OF THE WOODS
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|
Reference ID |
Created |
Released |
Classification |
Origin |
VZCZCXRO1151
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0118/01 0440904
ZNR UUUUU ZZH
R 130904Z FEB 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 4040
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2198
RUEHAR/AMEMBASSY ACCRA 2629
RUEHDS/AMEMBASSY ADDIS ABABA 2751
RUEHRL/AMEMBASSY BERLIN 1228
RUEHBY/AMEMBASSY CANBERRA 2020
RUEHDK/AMEMBASSY DAKAR 2376
RUEHKM/AMEMBASSY KAMPALA 2800
RUEHNR/AMEMBASSY NAIROBI 5228
RUEHGV/USMISSION GENEVA 1921
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE
RUEAIIA/CIA WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/JOINT STAFF WASHDC
RHEHAAA/NSC WASHDC
UNCLAS SECTION 01 OF 04 HARARE 000118
AF/S FOR B. WALCH
AF/EPS FOR ANN BREITER
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
AGRICULTURE FOR RONALD LORD
COMMERCE FOR ROBERT TELCHIN
TREASURY FOR D. PETERS AND T. RAND
STATE PASS TO USAID FR L.DOBBINS AND E.LOKEN
SENSITIVE
SIPDIS
E.O.12958: N/A
SUBJECT: ZIMBABWE’S BANKING SECTOR NOT YET OUT OF THE WOODS
REF: HARARE 00096
——-
SUMMARY
——-
¶1. (SBU) Dollarization introduced in the January 2009 Monetary
Policy Statement (MPS) brought relief to the banking sector.
Banking had become unsustainable as Zimbabwe dollar denominated
revenue failed to cover rising foreign currency denominated costs.
The continued depreciation of the local currency and hyperinflation
compounded the sector’s predicament. Dollarization allows
institutions to levy charges and lend in foreign exchange, thus
improving the banks’ viability. But problems related to the
introduction of statutory reserves and ceilings on lending rates
still militate against profitability at most banks. These
constraints need to be addressed in order to allow the sector to
play an effective role in Zimbabwe’s economic recovery. END
SUMMARY.
———————————–
Banks Welcome Partial Dollarization
———————————–
¶2. (SBU) Commercial and merchant banks welcomed the partial
dollarization of their income in the January MPS (reftel). John
Mushayavanhu, Managing Director of First Bank Limited and Deputy
President of the Bankers’ Association of Zimbabwe (BAZ), told
economic specialist on February 10 that most of the costs of
financial institutions have been denominated in U.S. dollars while
their income up until now has been entirely in local currency. In
fact, Fulton Chibaya, Chief Executive Officer of Genesis Financial
Holdings Limited, told economic specialist on February 11 that banks
had stopped lending in the last quarter of 2008 because no one
wanted Zimbabwe dollars anymore. With workers demanding salaries in
U.S. dollars, banks were finding it increasingly difficult to remain
viable.
—————————————
Business Not Likely To Boom Immediately
—————————————
¶3. (SBU) Mushayavanhu explained that the partial dollarization of
the sector enabled banks to levy charges in foreign exchange on
foreign currency account (FCA) transactions. The income would help
the banks cover their foreign exchange denominated costs. In the
short term, he predicted that revenue would be predominantly from
transaction fees. Mushayavanhu did not envisage an increase in
lending due to the foreign currency shortage. Furthermore, he said
the thin margins arising from high costs combined with the interest
rate limit of LIBOR plus 1-6 percent prescribed by the Reserve Bank
of Zimbabwe (RBZ) made lending unattractive. Mushayavanhu
calculated that with 1-month LIBOR at the very low rate of 0.45
percent as of February 10, the interest rate on loans was capped at
only 6.45 percent.
Qonly 6.45 percent.
—————————
New Business Model Required
—————————
¶4. (SBU) Both Chibaya and Mushayavanhu told us that the banks’
network of branches throughout the country was designed for trade in
HARARE 00000118 002 OF 004
Zimbabwe dollars. Chibaya said that the recent shift to hard
currencies did not fit the model; there was insufficient foreign
currency in circulation to support the huge overhead. He predicted
most banks would suffer losses for a while before returning to
profitability. Mushayavanhu told us that banks were re-establishing
relationships by luring clients to open FCAs. Merchant banks, on
the other hand, have maintained lean structures historically and are
therefore better able to be profitable in the short term, in
Chibaya’s view. Nevertheless, they are also busy encouraging major
exporters to open FCAs in their books.
¶5. (SBU) Chibaya told us that the MPS was positive in that it
encouraged banks to lend to the productive sectors. However, he did
not envisage any growth in lending in Zimbabwe dollars. Most
companies needed to recapitalize their businesses and needed foreign
currency to do so. Nor did he foresee short-term growth in the
sector due to the lack of foreign exchange, but he hoped that
foreign financial inflows would resume immediately following the
formation of an inclusive government.
——————————————— —
Salaries and Other Costs Now In Foreign Currency
——————————————— —
¶6. (SBU) With regard to costs, Mushayavanhu told us that salaries
and wages for bank employees will now be paid in foreign currency,
with the minimum monthly wage at around US$120. However, he pointed
out that in last year’s collective bargaining agreement, the minimum
wage was set at US$311 and converted into Zimbabwe dollars at the
ruling inter-bank exchange rate. He said such rates, now payable in
foreign currency, were unsustainable today. Banks could not
generate the revenue in foreign exchange to pay high salaries, but
Mushayavanhu foresaw a narrowing of salary differentials between the
lowest and highest paid employees.
———————————————
Statutory Reserve Requirements Increase Costs
———————————————
¶7. (SBU) In the MPS, the RBZ introduced a 10 percent statutory
reserve requirement on FCA deposits and lowered the requirement on
Zimbabwe dollar denominated deposits from 50 percent to 15 percent.
Mushayavanhu lamented the introduction of statutory reserves on
FCAs. He questioned whether the money would be available on demand
at the RBZ in view of the RBZ’s history of expropriating the FCAs of
companies and NGOs. (NOTE: Statutory reserves must be held at the
RBZ; vault cash does not count toward required reserves. END NOTE.)
Both bankers agreed that the statutory reserves would raise costs
Q Both bankers agreed that the statutory reserves would raise costs
which the banks would not be able to recover from lending or other
activities. Chibaya told us that the imposition of statutory
reserves and interest rates on FCA deposits, while designed to
attract clients, would erode margins further. He believed the
introduction of statutory reserves on FCA deposits reflected the
RBZ’s desperate need for foreign currency. Hardly a week after
announcing the measure, the RBZ was calling on banks to pay up.
Mushayavanhu told us that the announcement to localize the FCAs of
platinum and diamond mining companies was driven by the RBZ’s need
to access as much foreign exchange as possible through the statutory
reserves that arise from such new deposits. However, Mushayavanhu
noted that banks whose clients’ FCAs had been raided by the RBZ and
not repaid were setting off such amounts for statutory reserves with
the concurrence of the RBZ.
HARARE 00000118 003 OF 004
¶8. (SBU) The banks are also concerned about the method used to
calculate statutory reserves. Because banks have to pay the
reserves every Monday for the previous week’s deposits, Mushayavanhu
feared that they may have to pay reserves on deposits that are no
longer on their books. For example, the RBZ allows clients to
withdraw as much as US$250,000 from their FCAs at any time, “no
questions asked.” Chibaya told us that the amount was variable, and
could be as high as US$1 million. If a large withdrawal occurred on
a Saturday, statutory reserves would still have to be paid on the
following Monday.
¶9. (SBU) A senior executive at CBZ Bank Limited (where Gideon Gono
served as CEO before becoming Governor of the RBZ) told economic
specialist on February 12 that Gono had set the foreign exchange
withdrawal ceiling too high – probably to allow ZANU-PF cronies to
move large amounts of money out of the country easily – but to the
detriment of the banking sector.
———————————–
RBZ No Longer Lender of Last Resort
———————————–
¶10. (SBU) Another challenge highlighted by Mushayavanhu related to
clearances. The RBZ can no longer act as a lender of last resort
for hard currencies (as it has for the Zimbabwe dollar) since the
RBZ itself is short of foreign exchange. In addition, commercial
and merchant banks do not have foreign currency denominated bank
accounts in Zimbabwe to smooth out the clearing system.
Mushayavanhu explained that settlement has to be done offshore,
which will lengthen the clearing process.
——————————–
No Problem with Capital Adequacy
——————————–
¶11. (SBU) The RBZ in the MPS restated that commercial and merchant
banks have a minimum capital requirement of US$12.5 million and
US$10 million respectively. Chibaya and Mushayavanhu concurred that
this did not pose a problem for the banks because certain fixed
assets, such as buildings, are considered part of shareholder funds.
Since most banking institutions own buildings they will find it
relatively easy to meet the minimum capital requirement.
——-
COMMENT
——-
¶12. (U) Commercial and merchant banks are hopeful that dollarization
will drive the sector’s recovery. However, Zimbabwe’s capacity to
go it alone has been crippled by years of poor macroeconomic
policies that have reduced exports to a trickle. Kick starting
recovery will require a large injection of foreign currency. Even
with the inclusive government in place, and assuming the beginning
of political and economic reform, it will take some time before
donors and the international financial institutions develop the
Qdonors and the international financial institutions develop the
confidence to reengage with the GOZ. In the short-term, the banking
sector may still face innumerable problems that will require it to
restructure and downsize operations to survive. Further reforms are
needed in the sector; banks should be allowed to offer competitive
interest rates to mobilize savings that can be channeled to
HARARE 00000118 004 OF 004
productive areas; and the ceiling on lending rates must be removed
if banks are to play their intermediary role effectively. END
COMMENT.
DHANANI
(33 VIEWS)
