BANKING SECTOR STABILITY IN ZIMBABWE: Strengthening Transparency and Accountability
On 10 September 2015, the Southern African Political Economy Series (SAPES) Trust held a Policy Dialogue Forum on the subject of stabilizing the banking sector within the context of greater transparency and accountability. The two presenters were Messrs Sam Malaba, President of the Bankers’ Association of Zimbabwe, and Prosper Chitambara from the Labour and Economic Development Institute of Zimbabwe (LEDRIZ); with Dr Phineas Kadenge, Chairperson of Economic Department at the University of Zimbabwe, as discussant. I chaired the session that was set in the background of a recent Presidential State of the Nation Address and an IMF mission to Zimbabwe.
Mr Malaba’s presentation covered the current state of banking and outlined a positive picture of growing reforms. The coming into effect of Zimbabwe Asset Management Company (ZAMCO) and the RBZ Debt Assumption Bill had reduced indebtedness in the banking sector (by at least $15.7 million) after taking over Non-Performing Loans (NPLs), but not those arising from insider trading. Bank supervision by the RBZ was including stress tests and monitoring capital adequacy. The BAZ, Ministry of Finance and RBZ held regular consultative meetings, and working relationships were generally good under this “partnership in policy making and management” of the banking sector.
The establishment of a Credit Reference Bureau was under way and this would help bankers improve their lending practices by avoiding chronic defaulters. The forthcoming Banking Act would address issues of good corporate governance, improve bank supervision, prescribe that each bank must have a Risk and Audit Committee, while failing banks were “quietly negotiating a surrender of their licences to the RBZ”. There was still need to address the loan to deposit ratios in the sector, as well as increasing liquidity issues in an environment where exports were only half the volume of imports – leading to a persistently high trade deficit. Although there was a view that Zimbabwe was over-banked, this was not the view of BAZ; although there is room for some consolidation.
Mr Chitambara provided a broad overview of the Zimbabwe banking sector very much along the lines outlined by Mr Malaba, but added the dimension of size comparison between Zimbabwe, South Africa, and Nigeria – concluding that the Zimbabwe banking sector faced major growth challenges. Both Messrs Chitambara and Kadenge concurred with Mr Malaba that there was promise of improved governance in the forthcoming Banking Act, but wanted more done in terms of past shortcomings in the sector – especially over money lost by clients when the RBZ took over accounts and used these funds during the hyperinflationary period.
During discussions, the audience expressed concern over several issues, among them the quality of bonds being issued by the RBZ, problems of disclosure in the sector, lack of liability on the part of RBZ and indigenous banks that had collapsed, uncertainty over stability in the sector especially in view of the impact Rand/US$ value is having on the Zimbabwe economy, fear about future banking policies, and an overall mistrust of the banking sector by the population.
RBZ Debt Assumption Bill
The audience was concerned about problems of accountability and transparency in the way this Bill had been formulated and passed into law. From an accountability perspective, concern was expressed that individuals and institutions that handled and benefitted from the funds had not been asked to account for their activities or use of funds and accept responsibility. Instead, Government had assumed the debt, which would be repaid by the whole population while benefits had gone to a few individuals. Secondly, there had been little transparency in the handling of the bill and its provisions, especially the poor disclosure, clarity, and accuracy of information as to who had benefitted and by how much. Concern was expressed that the bill had set a bad precedence of impunity, and this did not give the population confidence that similar actions would be punished in future.
Background to the Bill and emerging issues
Objectives of the Bill: The bill was an attempt to clean up the Reserve Bank balance sheet; while putting in place a mechanism to document details of the debt. It consolidated domestic and external debt within the total sovereign debt; clearing the way for a less encumbered RBZ to resume its normal activities.
Some details of the debt: The bill covered an amount of US$1.3 billion. The debtors were left on the RBZ balance sheet as an asset while liability to pay the creditors was shifted to the MOF. Thus, the MOF cannot collect from debtors, but must pay the creditors. From a study of the schedule of bill, close to $600 million was owed to domestic creditors, just under $700 million was owed to external creditors, but there was no breakdown of debtors. The total money borrowed by RBZ had risen from $165 million in 1998 to $1.3 billion in 2008; and with a 5% interest rate, the total debt had risen to $2 billion by 2015.
Beneficiaries of $1.3 billion: Most of money financed quasi-fiscal activities undertaken by RBZ “to rescue the country”, with the agricultural sector being the main beneficiary in order to revive agriculture through A2 farmer equipment loans. Some of the money went towards the purchase of drugs and other consumables considered strategic national goods; while the MOF adopted some of the external bank borrowings during the period of Inclusive Government.
Looking ahead: The Debt Management Office in the MOF maintains all records of sovereign debts, and a breakdown of the $1.3 billion (and $2 billion with interest) will be collected and maintained in this office. A resolution of the national debt (over $10 billion) will in future include this RBZ-incurred debt; while debt owed to dispossessed former white farmers has yet to be tackled.
RBZ debt challenge: Should farmers who received equipment under RBZ quasi-fiscal activities assume debt liabilities to RBZ? Who should assume liability for debts incurred to purchase public goods like drugs, food, water treatment chemicals? With the CSOs calling for an audit of the RBZ as well as the national debt, how will results from these audits be used?
Development challenge: To what extent should the results of a review of past debts be used to reform the future system, as opposed to “settling problems from past shortcomings”? For a country with the potential to produce a $100 billion economy within a few decades, how much should a Debt Resolution Strategy be about recovering lost monies, and how much about informing forward-looking policies and strategies?
Debt resolution strategy: At the time Zimbabwe Government sits down with its Creditors to discuss debt restructuring, rescheduling, write-off, or any other option; the final mix of instruments will depend on the state of the economy and realism of proposed policies.
While the Policy Dialogue Forum focused on the accountability of those in authority to the citizens, little was said about the obligations of citizens in demanding accountability - in this case from those responsible for the banking crisis. It was for instance not clear why commercial banks had not asked customers to come for their money when the RBZ threatened to take over these accounts without permission from bank account holders; or why the latter did not immediately withdraw their money when it was clear that the RBZ was taking over clients’ funds without seeking the permission of owners.
A discussion on mutual accountability would not just focus on the actions of those in authority, but also of those demanding accountability. The printing of money by the RBZ led to hyperinflation that wiped out the value of such assets as houses to the extent that home mortgage repayments in local currency dropped dramatically in relation to hard currencies to the extent that a mortgage worth US$400,000 could be repaid with an equivalent of US$1,000 when exchanged at the RBZ controlled exchange rates. This transfer of value from banks and building societies to a few individuals meant that the value of insurance, pensions, and other instruments held by these institutions for the majority was wiped out - and it became patently clear when the economy was dollarized.
Similarly, Government price controls of maize and other goods meant that value was being transferred from traders to the buying public who paid in local currency while traders paid for imports in US$ and Rands. There is no evidence that the general public or its advocates resisted these developments, happily accepting the benefits while enterprises lost their stocks and any ability to replace them. Some of the farmers who had received free inputs and produced crops had to sell at heavily subsidized prices – often lower than the total cost of production; but the consuming population did not advocate for fair trading practices at the time.
In this respect, the Zimbabwean population is not any different from other peoples around the world. The destruction of production systems that produce short-term benefits often lead to long-term economic difficulties; but individual consumers in the population generally do not make the connections in order to demand accountability from their own actions. It is this dimension of mutual accountability that requires activation to maintain a healthy balance with regular mechanisms for accountability demanded from those in authority.