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C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000091 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR S. HILL 
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN 
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN 
TREASURY FOR J. RALYEA AND T.RAND 
COMMERCE FOR BECKY ERKUL 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
 
E.O. 12958: DECL: 11/21/2017 
TAGS: EFIN ECON PGOV ASEC ZI
SUBJECT: LOOMING LIQUIDITY CRISIS THREATENS ZIMBABWE,S 
BANKING SECTOR 
 
REF: A. HARARE 0089 
 
     ¶B. HARARE 0073 
 
Classified By: Amb. James D. McGee for reasons 1.4 (d) 
 
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SUMMARY 
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¶1. (C) Zimbabwe's banking sector has been heading toward a 
liquidity crisis arising out of a patchwork of misguided 
monetary policies and their disastrous consequences.  Onerous 
statutory reserve requirements, punitive overnight 
accommodation rates, a hyperinflationary environment that is 
spurring growth of the informal sector, the erosion of the 
banks' deposit base as the economy shrinks and confidence 
drops are all factors that have wreaked havoc on the banking 
sector in the last weeks.  Most recently, the bank transfer 
system has broken down. The Reserve Bank of Zimbabwe (RBZ) 
has added further to the fragility of the banking sector over 
the past months by extending deeply concessionary facilities 
that have dried up banks' commercial lending lines and driven 
some banks into non-traditional and prohibited activities, a 
dangerous practice that has caught up with them. As a result, 
the prevailing liquidity crisis threatens the survival of a 
number of financial institutions. RBZ Governor Gono has 
appeared unfazed by the high risk of contagion in the sector. 
 While he provided some relief to the banks January 31 by 
lowering statutory reserve requirements by 10 percent, 
without a multifaceted package of internally consistent 
policies his patchwork of remedies has no chance of restoring 
the health of the banking sector and of the economy in 
general. END SUMMARY. 
 
--------------------------- 
Banks Face Liquidity Crisis 
--------------------------- 
 
¶2. (C) Zimbabwe's banks have been facing a liquidity crisis 
that started in October 2007 and is being fueled by numerous 
factors as described below.  According to Best Doroh, Chief 
Economist of ZB Bank, at first the banks were able to cover 
their shortages by borrowing in the inter-bank market. 
However, the shortages have spread to all banks since 
mid-January, forcing them to resort to the RBZ at the 
unprecedented and prohibitive overnight accommodation rate of 
975 percent for secured and 1,500 percent for unsecured 
borrowings. Gono raised the accommodation rates to 1,200 
percent for secured and 1,600 for unsecured lending in his 
Monetary Policy Statement (MPS) of January 31, 2008 (septel). 
 
-------------------------------------- 
Onerous Statutory Reserve Requirements 
-------------------------------------- 
 
¶3.  (SBU) The statutory reserve requirement on banks, which 
is intended to be a prudential measure against default and 
does not earn interest, has also been punitively high at 50 
percent for demand deposits and 45 percent for time deposits. 
 Gono reduced the requirement by 10 percentage points in his 
MPS yesterday.  The still very high rate acts as a tax on 
banks as they seek to mobilize deposits. 
 
--------------------------------------------- ------ 
Bank Surpluses Swept Into Zero-Interest 270-Day CDs 
 
HARARE 00000091  002 OF 004 
 
 
--------------------------------------------- ------ 
 
¶4. (C) Furthermore, the RBZ has been sweeping any surpluses 
that banks hold at the end of a trading day into 270-day 
non-negotiable zero-percent interest certificates of deposit 
(CD); the funds are unavailable for balancing out subsequent 
shortages. Pindie Nyandoro, former MD of Stanbic and outgoing 
president of the Bankers Association, explained to Ambassador 
on January 28 that to counter this additional onus banks 
tried valiantly to "hide" any day-end surpluses, for example, 
by pre-paying taxes or by onward lending at nearly any price, 
rather than hand money over to the RBZ on these terms. In his 
MPS, Gono lowered the tenure of the CDs to seven days from 
270 days.  (Comment: The move will have little effect on the 
immediate liquidity problem as no banks have surpluses these 
days. End Comment) 
 
--------------------------------------------- ----- 
Coupled With High Demand For Cash And Low Infusion 
--------------------------------------------- ----- 
 
¶5.  (C) At the same time, the banks' deposit base has shrunk 
just as demand for cash has skyrocketed with the increased 
informalization of the economy. Indeed, few traders in the 
informal sector maintain bank accounts and Zimbabweans' 
confidence in the banks is at an all time low. According to 
ZB Bank, higher new cash withdrawal limits for individuals 
and companies (Z$500 million per day) without a commensurate 
injection of cash have also contributed to the net outflow of 
cash from the banking system in the past weeks.  In addition, 
since mid-January 2008, the RBZ has slowed the pace of 
concessionary lending (25 percent annual interest) through 
the Basic Commodities Supply Side Intervention (BACOSSI) 
facility, which had been a major source of bank liquidity. 
 
----------------------------------- 
Electronic Transfer System Stutters 
----------------------------------- 
 
¶6. (C) Further exacerbating the liquidity crunch in the past 
few days has been a breakdown in the banking sector's 
electronic transfer system (Real Time Gross Settlement - 
RTGS), caused, according to the government mouthpiece The 
Herald, by recent prolonged power blackouts (Ref B).  The 
power failures have affected Zimbabwe's link with its South 
Africa-based server, as telecommunications have been relying 
on generators that "gobble up a lot of diesel."  Rather than 
occurring in real time, the RTGS transfers have been only 
trickling through the system, thus further raising the 
overall demand for cash. In his MPS, Gono raised the check 
limit from Z$500 million (US$80) to Z$10 billion (US$1610), 
which should provide volume relief to the overwhelmed RTGS 
system, but the power supply problem and challenge of 
handling mounting numbers of zeros will persist. 
 
¶7. (C) Our informal survey of the banks this week found them 
to be struggling; much of their borrowings from the RBZ are 
to cover clients' cash withdrawals and do not add to their 
profitability.  Reflecting these challenges, a number of the 
newer banks, such as ZABG, Genesis, Renaissance and Kingdom, 
failed to raise the required statutory reserves on January 
21, 2008.  Pindie Nyandoro told Ambassador that the banking 
sector had been short a staggering Z$160 trillion (US$5.3 
billion at the official exchange rate and US$25.8 million at 
the current bank transfer rate) on one particular day last 
 
HARARE 00000091  003 OF 004 
 
 
week. 
 
-------------------------------------------- 
Banks Resort to "Non-Traditional" Activities 
-------------------------------------------- 
 
¶8. (C) To stay afloat in an exceptionally difficult business 
environment, some banks have engaged in non-core and 
otherwise prohibited activities such as trading on the 
Zimbabwe Stock Exchange and trading in foreign exchange on 
the parallel market. These ventures have further exacerbated 
the liquidity problem, as not all assets can be easily 
liquidated, or liquidated without a loss.  Francis Macheka, 
Executive Director of Agribank told econ specialist that Gono 
directed "errant banks" earlier this week first to sell their 
shareholdings on the ZSE before coming to the RBZ for 
accommodation. Relatedly, Nyandoro told Ambassador that on 
January 25, the RBZ had denied even unsecured accommodation 
to some banks. She said Kingdom Bank, newly merged with the 
Meikles group, had most egregiously misdirected depositor 
funds to the stock market. In addition, CFX, ZABG, 
Metropolitan Bank and Interfin had weak balance sheets and 
were particularly illiquid. 
 
¶9. (C) The market believes Gono wants to see certain 
institutions collapse.  At a press conference one week ago 
with Finance Minister Mumbengegwi, Gono recklessly stated 
that there were too many banks in Zimbabwe for the size of 
the economy. Macheka, for his part, believes Gono has been 
spurned in trying to buy into certain banks, such as NMB and 
Genesis, and has put them on his "hit list." 
 
----------------------------------- 
Tinkering At The Margin Not Helping 
----------------------------------- 
 
¶10. (C) Gono's solutions to date have failed to address the 
liquidity crisis. Indeed, notwithstanding recent threats by 
both the Minister of Finance and Gono that if bank queues for 
cash persisted, they would take some unspecified action 
against the banks, the queues are still there.  Many banks 
have capped daily withdrawals at Z$200 million and ATM 
machines are only dispensing Z$50 million per customer. 
 
---------------------------------------- 
Financial Engineering Masks Major Losses 
---------------------------------------- 
 
¶11. (C) While the figures on private sector borrowings from 
banks look reasonably good, they hide the real problem 
created by the RBZ's subsidized funding to the private 
sector. Official figures show that the year-on-year rate of 
growth in money supply accelerated from 17,807.1 percent in 
August to 24,463.6 percent in October 2007 (the latest date 
for which data are available). Much of the recorded growth 
was accounted for by growth in domestic credit to both 
government and the private sector. In fact, growth in 
domestic credit to the private sector accounted for over 82 
percent of the recorded growth in total domestic credit. 
Although banks have raised their minimum non-concessionary 
lending rates to as high as 1,150 percent (Standard Chartered 
Bank), the bulk of the banks' loan book is deeply subsidized. 
In view of this, most banks are likely to record losses at 
the approaching end of their fiscal year. 
 
 
HARARE 00000091  004 OF 004 
 
¶12.  (C) Most worrying of all to Stanbic chief economist 
Panashe Chitumba and Nyandoro on January 28 was the high risk 
of contagion that Gono did not appear to be taking into 
serious account (Ref A).  In this regard, they described to 
the Ambassador the great extent of bank interdependence that 
arises through their borrowing on the inter-bank market, 
their common client base, and syndicated loans. 
 
------- 
Comment 
------- 
 
¶13. (C) Given the current liquidity crisis, the odds have 
been rising that some banks would fail in the near term 
unless a shift occurred very soon in monetary policy. Gono's 
announcement of slightly lower statutory reserve requirements 
in yesterday's Monetary Policy Statement provides some relief 
to the banks.  But in the medium term, it is just another 
patch on the tattered economy.  Many factors, as outlined 
above, are contributing to the bank crisis and only a 
multifaceted package of internally consistent policies has a 
chance of restoring the health of the banking sector and 
macroeconomic stability.  None of Gono's remedies, either 
individually or collectively, equates to such a comprehensive 
package of reforms. 
MCGEE