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Press release by Minister of Finance on improving financial liquidity
Tendai Biti, Minister of Finance
February 17, 2012

Introduction

In line with commitments outlined during the pre-Budget consultative process and in my January 25, 2012 Press Statement, Treasury will periodically be communicating on some of the major developments within the economy.

A major challenge I highlighted on January 25, 2012 was the on-going liquidity challenges being experienced in the financial system and throughout the entire economy.

While most of the measures I announced in the January 25, 2012 Press Statement and complemented by the Reserve Bank Monetary Policy Statement of January 31, 2012 are beginning to bear fruit, it is necessary that these be buttressed by additional measures.

Stakeholders would have witnessed notable improvement in the processing of RTGS transactions throughout the financial system.

Bank Deposits

In its Monetary Policy Statement of January 31, 2012, the Reserve Bank reiterated the need to ensure liquidity and fluidity in our domestic financial system.

As part of dealing with this, it has become necessary that we address this issue in support of boosting domestic market liquidity and lending to the productive sectors of the economy.

In doing this, Government and the Reserve Bank will remain fully cognisant of the need to ensure that the capacity of our banks to deal with their day-to-day international payment obligations, and ability to take positions in international markets is preserved.

Hence, dispensations will be given to allow banks' Nostro Account balances to meet commitments towards meeting such obligations as lines of credit, trade and project finance support.

After consultations with the Bankers Association of Zimbabwe, Government and the Reserve Bank concluded on the need for the repatriation of all other Nostro Account balances in excess of banks' needs, pending international payment obligations and for the purposes of taking positions in the international market.

This does not, however, affect the existing liberalised exchange control policy.

With effect from March 1, 2012, banks will, therefore, be required to maintain in their Nostro Accounts a maximum of 25% of their balances off-shore.

The maximum rises to 30% from June 1, 2012. This would also be in acknowledgement of the absence of a prudent statutory liquidity ratio.

Any amounts in excess of these thresholds will have to correspond to a bank's demonstrable pending international payment obligations.

Banks' Statutory Reserves owed by the Reserve Bank

Stakeholders will recall that in my Press Statement of January 25, 2012, I advised that, as part of the measures in support of improved market liquidity, Treasury would issue Discountable and Tradable Instruments to willing participant banks against Reserve Bank Statutory Reserve liabilities amounting to US$83.583 million.

The issuance of discountable paper instruments against the Reserve Bank Statutory Reserve liabilities is against the background of our limited fiscal space.

The maturity of the Instruments will range over 2 - 4 years as indicated in the Table below: -

The Instruments will have the following features: -

• Prescribed asset status;
• Liquid asset status;
• Half yearly coupon;
• Tax exemption;
• Tradable; and
• Lender of Last Resort security status.

The Reserve Bank already allows banks' Statutory Reserve balances to count towards the capital adequacy requirement.

Institutions not willing to participate in the above Scheme will have the option of being issued with 15 year Bonds at 3% per annum.

Treasury will immediately establish a Sinking Fund to cater for servicing of interest payments and maturities.

Infrastructure Development Bonds

I have already alluded to the challenges on the Budget with regard to meaningful interventions towards supporting infrastructure rehabilitation and development.

The large infrastructure funding requirements cannot be met from the current levels of fiscal revenues. This is more so, given the disproportionate demands on Government arising from both discretionary and non discretionary recurrent expenditures.

However, the state of some of our infrastructural facilities requires or calls for immediate interventions.

Hence, notwithstanding the prevailing challenges in the financial system, Treasury will be issuing Infrastructure Development Bonds to complement Budget resources set aside for the financing of the rehabilitation of infrastructure.

Given the need to abide by our cash budgeting principles, the Infrastructure Development Bank of Zimbabwe will be mandated to issue Infrastructure Development Bonds to the tune of US$50 million.

The Infrastructure Development Bonds to finance identified commercially viable quick win priority infrastructure projects will have the following features: -

• 5 year tenor;
• 10% interest rate per annum;
• Government guarantee;
• Prescribed asset status;
• Liquid asset status;
• Half yearly coupon;
• Tax exemption;
• Tradable; and
• Lender of Last Resort security status.

A Sinking Fund will also be established to facilitate interest and principal payments.

Lender of Last Resort

With regards to the build up towards the US$100 million Lender of Last Resort Facility at the Reserve Bank, in my Press Statement of January 25, 2012 I announced the provision of an additional US$20 million to the initial US$7 million.

I am pleased to announce that Treasury should be able to disburse this US$20 million during the course of the coming week.

Treasury is earnestly working with local and international financial institutions to finalise the mobilisation of the balance of US$73 million.

Once an agreement has been reached, I will announce the operational framework for the disbursement of these funds.

Cash Withdrawal Limits

Stakeholders will note that both myself in my Press Statement of January 25, 2012 and the Governor of the Reserve Bank in his Monetary Policy Statement of January 31, 2012 had instituted measures with regards to cash withdrawal limits as part of our efforts to deal with some of the liquidity challenges in the banking system.

I have already alluded to some of the positive effects the measures that I announced and those that the Central Bank announced are having with regards to the improving liquidity situation in the overall financial system.

Mindful of this, Government has noted that we move with circumspection with regards to the restrictive limits on withdrawals, that way also avoiding inculcating cultures that could see some persons shunning the banking sector.

In this regard, the Reserve Bank will, therefore, be reviewing the policy of limiting cash withdrawals with immediate effect.

Withdrawal Notices

In line with the improving liquidity situation, the Reserve Bank will also be reviewing the Withdrawal Notice Requirements that would not be deemed in line with support for orderly business and commercial transactions.

Stakeholders would, however, need to note that such reviews will be consistent with our regional and international obligations towards money laundering and countering the financing of terrorism.

With regard to Government transactions, Treasury will, however, continue to coordinate with line Ministries, also in support of orderly financial transactions within the banking system.

Plastic Money

In order to complement the above measures meant to support improved liquidity in the market, it will be necessary that businessmen and the general public broaden use of plastic money and that way reducing reliance on cash.

Government is, in consultation with the Reserve Bank and the Bankers Association, considering introduction of measures and fiscal incentives deemed necessary to promote broader use of plastic money.

Bank Accounts

Furthermore, all tax-paying traders and businessmen are being encouraged to open accounts with banks through which they will conduct their financial and tax transactions.

Financial Sector Legislative Reforms

In order to strengthen and deepen the financial sector, Treasury, the Reserve Bank, the Insurance and Pensions Commission and the Securities Commission will be reviewing the existing legislation governing the various financial sub-sectors.

This review will cover the following legislation:-

• Banking Act;
• Securities Act;
• Microfinance Bill;
• Insurance Act; and
• Pension and Provident Funds Act.

The review of the Banking Act will focus on capital adequacy of banks and governance deficiencies which have characterised the banking sector.

Notable examples include the need to ensure that shareholders have no role to play in the management of financial institutions.

This limits the prevalence of incidences of insider loans, abuse of depositors' funds and conflicts of interest.

The review on capital adequacy requirements should result in streamlining of the number of banks operating in the economy through mergers and the injection of new capital by investors.

Banking Sector Mergers

In its Monetary Policy Statement of January 31, 2012, the Reserve Bank indicated that 20 of the 25 operational banking institutions comply with the capital requirements. It is regrettable that 5 banks still remain under-capitalised in spite of moving the deadlines for compliance several times.

Given the importance of having a strong and secure banking sector that is immune to systemic risk, I have mandated the Reserve Bank to develop a framework for mergers between the banking institutions.

Modalities of this Framework will be announced in due course.

Conclusion

The above measures should significantly improve and alleviate the existing market liquidity challenges, and I should be updating stakeholders of any major developments.

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