Worthless Zimdollar notes clog banks

BANKS have requested the Reserve Bank of Zimbabwe (RBZ) to decommission $2 and $5 bond notes, saying smaller denomination currency ranges have turned into a burden for financial institutions to keep.

The two ranges were rejected by the market after hyperinflation returned in 2019, following a decade of stability.

First to be rejected was the $2 note after extensive depreciation in the aftermath of a hyperinflationary scourge two years ago.

But immediately after the $2 notes were rejected, the $5 notes faced market resistance after being battered on the parallel market.

Zimbabwe's informal traders, who now control an estimated 60% of the country's gross domestic product, turned down clients who were paying with these notes, forcing the RBZ to issue statements assuring consumers that both notes were still legal tender.

But in a paper sent to the Ministry of Finance and Economic Development spelling out the banking sector's expectations for the 2022 national budget, bankers said action was overdue.

"Phase out $2 and $5 bond notes as well as low denomination notes that were rejected by the market long back," the Bankers Association of Zimbabwe (BAZ) said.

"We propose that the RBZ phases out the $2 and $5 bond notes, which were replaced by $2 and $5 Zim dollar bills and mop them from circulation to create storage space in banks.

"Additionally, authorities need to remove low denominations off the system as they are causing storage and health challenges," BAZ added.

BAZ spoke as hyperinflation maintained fresh pressures on Zimbabwe's economy this month, with the annual rate surging to 54,49% after costs rocketed as companies indexed prices on parallel foreign currency exchange rates.

The rise represented nearly a three-percentage point move from 51,55% in September, and 50,24% the previous month.

BAZ added: "The Finance Act…provided that with effect from 01 January 2013, income related to residential mortgage finance business provided by other financial institutions became exempt from tax.

"This means income earned by commercial banks from the provision of residential mortgage loans is no longer taxed. However, the exemption is limited to residential mortgages and excludes commercial mortgage transactions.

"However, commercial mortgage lending plays a crucial role in infrastructure development and aid in capacitating players in the construction industry including property developers.

"This, therefore, aids in providing long term funding to the productive sector.

"We recommend that the exemption granted to commercial banks relating to mortgage finance related income be extended to include income relating to commercial mortgage finance business.

"That what should be exempt from income tax should be the activity (both residential mortgage and commercial mortgage lending and related income) instead of the building society license".

Banks, under pressure from authorities to inject billions of dormant foreign currency indexed liquidity on their books into industries, demanded concrete legislative guarantees that they would be allowed to collect repayments in United States dollars in the event of another currency change.

They have been the subject of rebuke since July, when George Guvamantanga, permanent secretary at the Ministry of Finance, disclosed that while industries were battling to raise up to US$2 billion for rebuilding bleeding companies following a prolonged meltdown, at least US$1,7 billion was locked up in their vaults.

This marked the first time that authorities have expressed disquiet over the decade-long cautious lending strategy being pursued by banks.

Financial institutions have been terrified by potentially high-level defaults in Zimbabwe, where an industrial crisis has been compounded by tepid demand triggered by Covid-19 induced hard lockdowns.

Subsequent to Guvamatanga's remarks, RBZ governor John Mangudya has piled pressure on banks to act and help stabilise jittery markets.

Banking sector non-performing loans were estimated at a healthy 0,3% in August this year.

But experts said the figure was low because loans to both individuals and companies were extremely low during the first eight months of 2021.