By Shame Makoshori
A payments gridlock within the banking sector threatens to ground the economy, already troubled by a liquidity crunch and an emerging foreign currency crisis, industry players warned this week.
The situation was made grave by the fact that the mining sector, which had appeared safe from payment problems that had affected other sectors, is also now facing international settlement problems that could ruin a faltering economy.
Industry players said a number of companies could fail to re-open next year after the annual shutdown due to the gridlock, which has hampered production following delayed payments for imported raw materials.
Challenges have returned to haunt international payments, which briefly normalised as from September after the central bank intervened with a US$215 million cash injection.
At the heart of the crisis is the failure by banks to settle companies’ foreign commitments in time, while the domestic market has been roiled by intermittent delays in the settlement of payments made through the Real Time Gross Settlement System (RTGS).
There has been a huge switch to the RTGS system in the past few months after a severe depletion of United States dollar stocks affected cash transactions, according to a snap survey by the Financial Gazette of several listed companies.
But the shift to electronic card payments, which recently overtook the cash system, has also been affected after some sectors, especially petroleum firms, started rejecting debit cards, saying they required cash to fund fuel imports.
Settlement problems became elaborate in the past few months when queues emerged at service stations, forcing the Reserve Bank of Zimbabwe (RBZ) to intervene with a US$160 million facility in order to secure adequate supplies this festive season.
The mining industry, which constitute over 50 percent of export earnings, was this week making frantic efforts to meet RBZ governor, John Mangudya, for assistance after payments to foreign suppliers faced hurdles, Chamber of Mines chief executive officer (CEO), Isaac Kwesu, told the Financial Gazette. He said it was taking up to one month for suppliers to receive payments, even after mines, the central bank and financial institutions had agreed to a four-day turnaround time.
Kwesu called on the central bank and financial institutions to honour their pledge to prioritise the mining industry, warning that leaving the situation to deteriorate could worsen the availability of foreign currency and intensify an already bad situation.
“We have requested a meeting with the RBZ to see how we can come up with a win-win situation because the mining industry generates foreign currency and must not be affected,” Kwesu said.
“We must continue giving them foreign exchange so that they keep generating foreign currency. The spares, equipment and other consumables that we use are mostly imported. If you do not have spares, you are grounded and production suffers. The implication is that foreign exchange availability will worsen. It may be that the allocations from the RBZ is not adequate or the banks’ priorities have changed. We met with the RBZ and banks and agreed that our turnaround (time) must be four days. But it is now taking a month or so,” he said.
The RBZ’s US$215 million cash injection into the banking sector to facilitate foreign payments had helped mining companies briefly, “but the problem has resurfaced again. Our suppliers are complaining that payments are not moving”, said Kwesu.
The priority list for imports put in place by the central bank seem to be warping, executives said, noting that even prioritised goods were now queuing for long periods to get foreign currency allocations.
Local bank’s nostro accounts, held in foreign countries to facilitate settlement of foreign exchange and trade transactions, are said to have dried up due to internal cash problems.
Zimbabwean firms making payments to foreign suppliers settle their accounts through the nostro accounts.
These have been affected by a slide in exports and high demand for foreign currency to import goods and services.
Zimbabwe National Chamber of Commerce (ZNCC) CEO, Christopher Mugaga, said applications for foreign currency allocations to the central bank by members were taking between two weeks and two months to be approved.
This had not only affected businesses, but had also frustrated their chances of returning to production next year. He said foreign suppliers of goods and services had been forced to revise their terms with Zimbabwean firms.
Most of them, he said, were now demanding cash up front.
“Ten to 15 percent of companies may not come back after the (annual festive season) shutdown,” Mugaga, an economist by training, warned.
“Delays in payments have worsened their chances of coming back,” he added.
The problems on the foreign currency payments front are the latest to dog Zimbabwe’s struggling industries and domestic consumers.
They have spent the entire year battling a deteriorating liquidity crisis, worsened by a sudden rise in externalisation of United States dollars, the flagship in a basket of foreign currencies introduced in 2009 to replace the Zimbabwe dollar, which had been driven out of circulation by runaway inflation
The RBZ says up to US$1,8 billion was being externalised every year. Moreover, imports have since 2009 been far higher than exports, resulting in a trade deficit of around US$3 billion annually.
Government has tried to address this problem by introducing a Statutory Instrument that banned the importation of at least 100 foreign product lines in June.
Experts said banks had witnessed increased pressure on their nostro accounts because of the widespread importation of goods and services into the country, against declining export revenues, resulting in their failure to meet the needs of their clients.
According to banks, close to 90 percent of the money circulating locally under the RTGS platform is not backed by real US dollar holdings.
This therefore means that funds held in the RTGS cannot be used to make international payments and can only be used for domestic transactions.
Since the inception of the multicurrency regime, the RTGS has been growing each year through private credit creation and most recently through issuing of Treasury Bills, which represent public credit creation.
In the face of cash shortages, the markets had shifted to the RTGS system for respite. But the flood to RTGS has also triggered payment delays locally, making it difficult for the public to transact. “The RTGS is now being fully utilised. Even people with small amounts of money are now transferring funds through the RTGS system because of the shortage of cash. As a result, there is a huge backlog of applications to process. RTGS is now even done through the phone,” said a financial markets analyst.
Mobile payment platforms such as Ecocash and Netcash have also been affected by the cash shortages.
And in rural areas, Zimbabweans have resorted to barter trade.
Consumers had turned to the electronic card payment system for transaction, to compliment the RTGS.
An official with a listed firm said in the weeks following the introduction of bond notes, cash payments had declined to less than US$1 000, from US$20 000 daily.
“Card transactions have increased,” the financial director of the firm said.
“Our issue remains on foreign payments. Besides receiving payments generated through exports, we remain in the queue because the allocation process is taking long, many days or weeks. We end up buying locally but the problem is that this is expensive.”
Themba Ndebele, president of the Retailers Association of Zimbabwe, said there is now a shortage of both US dollars and the recently introduced bond notes.
“Card transactions are increasing and there is a shortage of both bond notes and US dollar notes,” said Ndebele.
Mangudya, however, told the Financial Gazette that the outlook was promising.
He said real stability would be achieved once industrial capacity utilisation has gone to 75 percent.
“I sincerely believe and I am convinced that capacity utilisation should expand to around 75 percent to support a strong domestic economy that can withstand counter cyclical challenges. Our other major challenge is fiscal consolidation, which can also be addressed from both the supply side and demand side. Their (industry and consumers) response has been positive. They are also urging us to remain focused and to continue with the restraint strategy of releasing bond notes into the market,” he said.
Mangudya added that international financial institutions have backed his strategy to introduce bond notes with restraint are urging him to continue with his controversial monetary reforms.
The central bank boss said the introduction of bond notes on November 28 to fund export incentives has improved foreign currency inflows, but demand for hard currencies was still outstripping supply, triggering the delays that have crippled industries.
“Use of bond notes for purchasing fuel at service stations (for example) preserves foreign exchange and makes it more available for importing the commodity as opposed to double dipping,” said Mangudya.
“It is not the import priority list that has challenges. The challenge is that the demand for foreign exchange is higher than its supply. This is the reason we are promoting exports. Our view is that the import priority list is not a measure that is cast in stone. We keep on reviewing it to take account of emerging circumstances,” Mangudya said.
He then pleaded with the banking public: “Let’s put the nation first before self in order to improve the economic welfare of the nation. We need to rise and build the nation through productivity and export growth.”