Opinion / Columnist
Confidence in the financial sector
29 Oct 2017 at 11:19hrs | Views
At the heart of the economy, is the financial system. And at the heart of the financial system, is the confidence in the sector. However the system is sensitive to the expectations of the unknown and lack of confidence. Questions are posed as to how confidence can affect the financial system.
The financial system embraces the policies and practices affecting a nation's money. It is generally concerned with regulations governing coinage, emission of money, monetary reserves, and legal tender. It is associated with requirements and regulations affecting the value of different types of paper money and coins in terms of standard or fiduciary money.
Approaching the end of September 2017, the prices of basic commodities increased especially in the informal sector and there was a shortage of fuel in Zimbabwe for about 24 hours. This was sparked mainly by a series of social media unauthenticated facts that 'falsely' threatened the return of a dark era in the Zimbabwean economy where the world's 30th hyperinflation was recorded in 2008. Prior to this, the shortage of foreign currency in the economy changed the illegal exchange rates, with the enormous demand for foreign currency exceeding the supply. This led to an inequality in the value of the BOND Note and the value of the USD in the black market. The shortage of money in the economy led to the buying and selling of plastic money and hard cash. Hard cash was being sold at an interest of upto30% before the government introduced a statute that makes the practice illegal. With the fear of the unknown and uncertainties, a failure of the economy was inevitable without the interventions from the government.
Expectations are a major factor in the financial system. They cause fluctuations especially in the short run, in a situation of uncertainty. In an open economy with no government intervention, uncertainty and expectation may cause significant changes in the financial system. In a dilemma where there is an expected rise or fall in the value of money, economic agents change their demand or supply of financial assets as perceived to be economic animals. If the value of money is expected to decrease, economic agents who wish to avert losses, increase prices. This may spark a chain reaction which can change money market factors like exchange rates which can begin the inflation and may lead to short run shortages in an economy.
In 2015, prior to Pravin Gordon being put to 'finance minister' office, South Africa's Jacob Zuma had changed 3 people for the same post within 3 weeks. The South African finance system responded with Rand devaluation following the uncertainties of policy changes. People 'feared the unknown' but avoided gambling with their money and the demand for their local currency lowered, which led to chain factors forcing the value of the SA Rand down. Their currency fell to a peak of almost USD $1: ZAR R16. Although devaluation of a currency has its advantages, the purchasing power parity of ZAR Rand fell significantly. This shows the sensitivity of the financial system to confidence in the money system in as far as uncertainty and expectations are concerned.
However Pravin Gordon went on to stabilize the economy and the Rand regained its value and went up to approximately USD $1: ZAR R11. His policies and changes in the economy favoured economic success and he proved the unviability of the previous negative confidence. In early 2017 Gordon was removed from office and in that week the Rand lost about 20% of its value. The financial system is very sensitive to uncertainties and lack of confidence especially if there are major changes like the appointment of a new minister.
A depression in 1929 was sparked by a similar chain reaction that was affected by how the economic agents in the USA expected their economy to perform. There was a lot of uncertainty in their financial system. This led to the increase of the GDP not with respect to the increase in the goods market, but to an increase in inflation. Generally the public has lower confidence in the finance system in Zimbabwe. This is another reason why Zimbabwe dollarized and is failing to achieve necessary conditions to have its own currency as stated in the monetary policy. For some time the Reserve Bank of Zimbabwe was a reserve less Central Bank. In pursuit of controlling the economy, one may wonder how it could manage with limited influence, to make major decisions e.g. to increase the GDP, a central bank may propose increasing the government expenditure for the accelerator multiplier effects.
For example, the public has lower confidence in the Banking sector that accepts deposits in Zimbabwe. In terms of section 2 of the Banking Act, a bank is an institution that conducts banking business in Zimbabwe whose business consists mainly consists of the acceptance of deposits withdrawable by cheque or otherwise. The depositor's money should be available when demanded in the same form in which it was deposited or its equivalent and this is not usually the case in Zimbabwe. With a lot Banks' 'ATMs' not working at night, there are 'withdrawal limits' which were set to manage the liquidity and money supply by the RBZ. Sometimes the bank customers are told there is no money in the bank, which violets the bank's mandate to pay the depositor's on demand and may lead to a 'bank run'.
When Dr Gideon Gono was governor, a lot of banks failed and to answer his critics he explained how each of the failed banks came to an end. Lack of confidence in a bank is one of the major reasons why most banks failed. When Trust bank wanted to safe guard the depositor's money from inflation, it invested the money in immovable property, real estate, which cannot be disposed of easily. When depositors want their money, it cannot be easily recoverable; hence, word spread about the mistrust and lack of confidence may lead to most of the depositors wanting their money back leading to a 'bank run'. Lack of confidence in the bank by depositors would have made the bank to liquidate as it will not have enough liquid assets or equivalent to pay off debts as they fall due.
Currently and for some time now the economy has low foreign currency reserves. This has reduced the confidence of the existing foreign investors, who find it an agony to repatriate profits to their original countries. With the use of Bond Notes in the economy that can only be used legally within the boundaries of Zimbabwe, companies who wish to possess the foreign currency have to apply to RBZ. How then can a country expect foreign direct investment in such field of play in as far as financial system is concerned? Indigenization policy could not help but add fuel to the fire. FDIs investors are expected to pitch in as minority shareholders in Zimbabwe. In this economy, the only way to have FDIs increasing is if these few rich Zimbabweans partner with potential investors. Theoretically it empowers locals, but realistically people's standards of living are made worse off if these investors shun away.
In the case of Standard Chartered vs a Chinese company, the RBZ refused to give back the money they took from the former as foreign currency reserves when the latter demanded their deposit back. Such stunts, although legal and made for the benefit of the economy, they create negative expectations that further reduce the confidence in the financial system. In order to sustain the shortages of foreign currency, the government prioritises some foreign expenses and that halts all other expenses that are less important. This may correct the deficit in the balance of payment but it builds a lot of mistrust from the locals and abroad. This has improved the BOP but uncertainty prevails especially with retaliation from abroad which may lead to reduced exports.
However the government of Zimbabwe's action to keep the economy afloat has been successful to a certain extent. The governor of Zimbabwe John Magudya made some assurances regarding the Bond Note not having an exchange rate and this directly reduces the uncertainties and bad expectations. When the Bond Note started having an exchange rate in the black market, the government issued a statute that illegalised unlicensed selling of money that had people panicking following speculation on the return of inflation.
In as far as economics concepts are concerned; my concern was the disappearance the USD in the economy which could trigger shortages of commodities. This was not a short term prediction but currently USD bills are difficult to find in the market. Economic agents can destroy an economy. Lack of confidence and mistrust, lead to negative expectations and trigger an financial system failure. The social media is one platform that has built and destroyed the confidence in the financial system. With a lot of technological innovations, the law is lagging in terms of specific regulations. Prior to the inflation scare in September 2017, the government has introduced a ministry of cyber division in which is expected to spearhead the approval of a cyber bill.
Tryson G. Dube is Student at National University of Science and Technology Banking and Investment Management 'CBA-BIMP' (in progress)
The financial system embraces the policies and practices affecting a nation's money. It is generally concerned with regulations governing coinage, emission of money, monetary reserves, and legal tender. It is associated with requirements and regulations affecting the value of different types of paper money and coins in terms of standard or fiduciary money.
Approaching the end of September 2017, the prices of basic commodities increased especially in the informal sector and there was a shortage of fuel in Zimbabwe for about 24 hours. This was sparked mainly by a series of social media unauthenticated facts that 'falsely' threatened the return of a dark era in the Zimbabwean economy where the world's 30th hyperinflation was recorded in 2008. Prior to this, the shortage of foreign currency in the economy changed the illegal exchange rates, with the enormous demand for foreign currency exceeding the supply. This led to an inequality in the value of the BOND Note and the value of the USD in the black market. The shortage of money in the economy led to the buying and selling of plastic money and hard cash. Hard cash was being sold at an interest of upto30% before the government introduced a statute that makes the practice illegal. With the fear of the unknown and uncertainties, a failure of the economy was inevitable without the interventions from the government.
Expectations are a major factor in the financial system. They cause fluctuations especially in the short run, in a situation of uncertainty. In an open economy with no government intervention, uncertainty and expectation may cause significant changes in the financial system. In a dilemma where there is an expected rise or fall in the value of money, economic agents change their demand or supply of financial assets as perceived to be economic animals. If the value of money is expected to decrease, economic agents who wish to avert losses, increase prices. This may spark a chain reaction which can change money market factors like exchange rates which can begin the inflation and may lead to short run shortages in an economy.
In 2015, prior to Pravin Gordon being put to 'finance minister' office, South Africa's Jacob Zuma had changed 3 people for the same post within 3 weeks. The South African finance system responded with Rand devaluation following the uncertainties of policy changes. People 'feared the unknown' but avoided gambling with their money and the demand for their local currency lowered, which led to chain factors forcing the value of the SA Rand down. Their currency fell to a peak of almost USD $1: ZAR R16. Although devaluation of a currency has its advantages, the purchasing power parity of ZAR Rand fell significantly. This shows the sensitivity of the financial system to confidence in the money system in as far as uncertainty and expectations are concerned.
However Pravin Gordon went on to stabilize the economy and the Rand regained its value and went up to approximately USD $1: ZAR R11. His policies and changes in the economy favoured economic success and he proved the unviability of the previous negative confidence. In early 2017 Gordon was removed from office and in that week the Rand lost about 20% of its value. The financial system is very sensitive to uncertainties and lack of confidence especially if there are major changes like the appointment of a new minister.
A depression in 1929 was sparked by a similar chain reaction that was affected by how the economic agents in the USA expected their economy to perform. There was a lot of uncertainty in their financial system. This led to the increase of the GDP not with respect to the increase in the goods market, but to an increase in inflation. Generally the public has lower confidence in the finance system in Zimbabwe. This is another reason why Zimbabwe dollarized and is failing to achieve necessary conditions to have its own currency as stated in the monetary policy. For some time the Reserve Bank of Zimbabwe was a reserve less Central Bank. In pursuit of controlling the economy, one may wonder how it could manage with limited influence, to make major decisions e.g. to increase the GDP, a central bank may propose increasing the government expenditure for the accelerator multiplier effects.
For example, the public has lower confidence in the Banking sector that accepts deposits in Zimbabwe. In terms of section 2 of the Banking Act, a bank is an institution that conducts banking business in Zimbabwe whose business consists mainly consists of the acceptance of deposits withdrawable by cheque or otherwise. The depositor's money should be available when demanded in the same form in which it was deposited or its equivalent and this is not usually the case in Zimbabwe. With a lot Banks' 'ATMs' not working at night, there are 'withdrawal limits' which were set to manage the liquidity and money supply by the RBZ. Sometimes the bank customers are told there is no money in the bank, which violets the bank's mandate to pay the depositor's on demand and may lead to a 'bank run'.
When Dr Gideon Gono was governor, a lot of banks failed and to answer his critics he explained how each of the failed banks came to an end. Lack of confidence in a bank is one of the major reasons why most banks failed. When Trust bank wanted to safe guard the depositor's money from inflation, it invested the money in immovable property, real estate, which cannot be disposed of easily. When depositors want their money, it cannot be easily recoverable; hence, word spread about the mistrust and lack of confidence may lead to most of the depositors wanting their money back leading to a 'bank run'. Lack of confidence in the bank by depositors would have made the bank to liquidate as it will not have enough liquid assets or equivalent to pay off debts as they fall due.
Currently and for some time now the economy has low foreign currency reserves. This has reduced the confidence of the existing foreign investors, who find it an agony to repatriate profits to their original countries. With the use of Bond Notes in the economy that can only be used legally within the boundaries of Zimbabwe, companies who wish to possess the foreign currency have to apply to RBZ. How then can a country expect foreign direct investment in such field of play in as far as financial system is concerned? Indigenization policy could not help but add fuel to the fire. FDIs investors are expected to pitch in as minority shareholders in Zimbabwe. In this economy, the only way to have FDIs increasing is if these few rich Zimbabweans partner with potential investors. Theoretically it empowers locals, but realistically people's standards of living are made worse off if these investors shun away.
In the case of Standard Chartered vs a Chinese company, the RBZ refused to give back the money they took from the former as foreign currency reserves when the latter demanded their deposit back. Such stunts, although legal and made for the benefit of the economy, they create negative expectations that further reduce the confidence in the financial system. In order to sustain the shortages of foreign currency, the government prioritises some foreign expenses and that halts all other expenses that are less important. This may correct the deficit in the balance of payment but it builds a lot of mistrust from the locals and abroad. This has improved the BOP but uncertainty prevails especially with retaliation from abroad which may lead to reduced exports.
However the government of Zimbabwe's action to keep the economy afloat has been successful to a certain extent. The governor of Zimbabwe John Magudya made some assurances regarding the Bond Note not having an exchange rate and this directly reduces the uncertainties and bad expectations. When the Bond Note started having an exchange rate in the black market, the government issued a statute that illegalised unlicensed selling of money that had people panicking following speculation on the return of inflation.
In as far as economics concepts are concerned; my concern was the disappearance the USD in the economy which could trigger shortages of commodities. This was not a short term prediction but currently USD bills are difficult to find in the market. Economic agents can destroy an economy. Lack of confidence and mistrust, lead to negative expectations and trigger an financial system failure. The social media is one platform that has built and destroyed the confidence in the financial system. With a lot of technological innovations, the law is lagging in terms of specific regulations. Prior to the inflation scare in September 2017, the government has introduced a ministry of cyber division in which is expected to spearhead the approval of a cyber bill.
Tryson G. Dube is Student at National University of Science and Technology Banking and Investment Management 'CBA-BIMP' (in progress)
Source - Tryson G. Dube
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