RBZ in statutory reserve requirements U-turn

Eight years after the Reserve Bank of Zimbabwe abolished Statutory Reserve Requirements for banks in a move aimed at releasing more funds for lending by the financial sector and lowering interest rates, the Apex Bank is reviving the requirement.

The move is expected to curb excess liquidity.

Statutory reserve ratio for banks is defined as a percentage of a bank's deposit holdings that must be preserved by the central bank as a form of security.

RBZ governor Dr John Mangudya recently said the restored Statutory Reserve Requirement, which becomes effective from the 1st of next month, will help mop up excess liquidity.

"Given the increased creation of money within the economy mainly as a result of fiscal imbalances, the Bank shall be introducing the statutory reserves requirement with effect from  November 1, 2018 at a level of 5 percent on Real Time Gross Settlement Foreign Currency Accounts (RTGS FCAs) on a weekly compliance basis in order to mop up excess liquidity from the market," he said.

But the central bank governor maintained that the AFTRADES window will remain in place as a lender of last resort facility to cater for financial institutions that require accommodation.

At 5 percent on RTGS FCAs, the statutory reserve requirement for Zimbabwe is lower than that of most Sadc countries.

Angola's reserve ratio percentage currently stands at 19 percent, while that of Malawi stands at 15,5 percent and Mauritius at 9 percent.

Mozambique's reserve ratio is at 15 percent, while that of Tanzania is at 8 percent, and Zambia and South Africa have reserve ratio percentages of 5 percent and 2,5 percent, respectively.

Comparatively, the EuroZone has a reserve ratio percentage of 1 percent, while China and the United States' stand at 15, 5 percent and 3 percent, respectively.

Analysts say statutory reserves are especially appropriate in a hyperinflationary environment where money supply will be rising at astronomical levels.

However, Zimbabwe's inflation rate is stable, with latest Zimbabwe National Statistics Agency figures showing that the year-on-year rate of inflation stood at 5,39 percent in September 2018 from 4,83 percent recorded in August 2018.

But the country has been facing challenges with excess liquidity.

Financial economist Mr Joseph Mverecha says excess liquidity can have negative effects on the economy.

"The economy requires liquidity to function properly. Liquidity is to the economy what oil is to the engine of a vehicle. But just as too much oil is not good for a car, too much liquidity is also not good for the economy.

"Liquidity by itself does not create value, but assigns a value to output. Production, though aided by liquidity, is really a function of supply side factors — our investment in capital, technology, labour and of course also availability of foreign exchange.

"These are the key determinants of production, output and value addition. Too much liquidity often translates into asset price bubbles, with visceral effects on the economy. These may include property, vehicles or even foreign exchange, as economic agents seek to hedge against loss of value," said Mverecha.

"The economy requires liquidity to function, but like wine, in moderation. Too much of it and all the excesses will impinge on production and productivity."

The re-introduction of the statutory reserve requirements for local banks will come in to complement the role being played by the RBZ Savings Bonds in mopping up excess liquidity from the market.

Official figures show that as at the close of August 2018 the Savings Bonds had raised at least $1,5 billion.