The figures are probably right, our Zimbabwean banks are lending not lending that much. But the big questions are why, and what else could the Reserve Bank do beyond picking up some of the programmes?
The central bank’s lending to government arguably, could have led to money supply growth, and cash shortages. What many find baffling is the trends in inflation, whereby the economy actually was in deflationary mode for the whole of 2016, and remains very low.
After all, textbook economics teaches that increasing money supply leads to rising inflation. The monetary base grew an estimated 150% in 2016, yet in inflation was negative 0.93%. This article takes a look into the developments that could have restricted inflation to the current low levels, with main emphasis being on analysing exiting monetary data.
Monetary base can be defined as the sum of local currency in circulation (bond notes and coins), and bank reserves held at the RBZ. Since 2010, the monetary base was largely made up of bank reserves, with the bond notes coming into play in 2016.
By April 2017, bank reserves had grown to nearly $1.4 billion, from below $200 million in 2010, while bond notes in issue stood at $164 million. In 2016, there has been a sudden increase in bank reserves, which hasn’t been matched by an equally dramatic increase in inflation for the same period.
Monetary base is not to be confused with money stock, which is largely demand deposits and short-term deposits. Often we confuse the literal printing of bond notes as inflationary, when it should ideally not be a decision on monetary authorities as to how much notes are in circulation.
This should be demand driven – the demand from depositors for cash. Rather we should worry about bank reserves, which is the monetary policy tool available to the RBZ.
In an ideal situation, the RBZ tightens the monetary policy by increasing the bank reserve ratio, and loosens it by lowering it.
When banks have to keep a large part of their assets in reserves, this restricts lending which slows down the money multiplier and resultantly money supply growth.
Our case is however, puzzling in that the RBZ has not set a minimum reserve requirement. It appears some banks are voluntarily keeping reserves and not lending. Other banks are using the excess reserves to buy Treasury Bills at a huge discount on the secondary market.
Simply put, banks are not lending Back of an envelope calculations show that the money multiplier has shrunk from 9.4 times in 2014, to 8.8 times by December2015. The multiplier drastically fell to 4.3 times as of December 2016, implying that banks are lending less. In 2016, bank credit to private sector declined 4.8%.
This anomaly could partly explain the trends in inflation contradicting text book economics. It appears that in absolute terms, money supply has been growing by the quantum of the RBZ credit to central government.
So yes money supply is growing, but you and me, we don’t have money in our accounts that could “chase the few goods”, because banks are not lending to private sector. There is no bank credit for both productive and consumptive borrowing. The average man on the street doesn’t have too much money, although money supply is growing.
Banks are smarting from high Non-Performing –Loans, so they are reluctant to borrow. The preferred borrower (salaried employees, mainly civil servants), is also over-borrowed and choking in debt. Banks worry about lending to agriculture (our biggest economic sector) because of non-transferability of land tenure, which diminishes the collateral value of land.
Faced by this scenario, banks are not lending to private sector. Some seem to be lending to government (buying TBs) so that government can take up credit risk in agriculture – for example. On the other hand, big banks are focusing on fortuitous non-interest income arising from the sudden increase in electronic transactions due to cash shortages.
From the graph, banks are parking money in Treasury Bills and/or as balances with the RBZ. Indigenous banks are holding relatively more in treasury bills than in bank reserves. They probably see the return on TBs as an opportunity cost to holding reserves, for it can be argued that the two assets carry similarly credit default risk, only that TBs earn you interest, while reserves don’t.
Foreign owned banks with larger depositor base, are probably cashing in on transactional fees, and would rather stay liquid on the RTGS. The banks, acting independently and in their own economic interests, are not lending. Where they lend, it appears they would prefer mortgages. One would speculate that home builders’ inflation has risen faster than the CPI index
There is sufficient evidence to believe that central bank funding the government is not always inflationary. In other countries, monetary financing has not been that inflationary, Canada decades ago, and the US recently. In those two cases, and similar to our case, bank reserves expanding with monetary financing, were countered by the collapsing multipliers – banks not lending.
So who is picking up the tab?
In Zimbabwe, it can be argued that banks are not lending, leaving the government to take up credit risks. The government has been spending on agriculture inputs and small scale miners, which is actually productive lending.
Whether this is the best way to allocate resources is debatable, but the macro-level results has benefited the productive sectors.
Some of the reasons for low inflation are administrative, or an act of God (good rains), and are beyond the scope of this article. For example, food, fuel, energy and utilities have been kept stable through government availing forex for fuel and electricity at the rate of 1:1. These do carry a huge weight in the CPI index.
Depositors should use electronic money for its conveniences not because of currency shortages. The two tier pricing whereby those using electronic payments are paying more cash (USD and Bond notes) has developed.
However, those paying more electronically might as well pay more in bond notes (should they be increased) depending on their choices.
Bond notes shouldn’t be inflationary, money supply growth is. The shortage of bond notes is actually pushing them into premium over electronic money, which creates unfair arbitrage opportunities for those with access to cash.
Imagine a farmer getting bond notes at a premium from street dealers. How is that different from getting bond notes from the bank and paying slightly more for goods and services? Is it not better for farmers and workers to access their cash from the bank, thank for street dealers to make a killing off their productive peers?
The RBZ should restrict money supply growth to contain inflation, but there is no need to starve people of currency.
- Brendrick Wamambo is a financial analyst who writes in his own capacity. Feedback email is firstname.lastname@example.org