If you are a fan of big numbers, Zimbabwe will never disappoint you. The numbers keep getting bigger.
The Aggregated Commercial Banks Balance Sheet is presented below.
- Balance Sheet Size
In ZWL terms, the balance sheet bulked-up by 7 billion dollars in May as shown below.
However, in USD terms the balance sheet lost a net weight of USD 124 m during the month of May. The conversion for May 2020 is done using an Inter-bank rate of 71 ZWL dollars for one (1) USD.
The contraction taking place in real terms is consistent with the decline in economic activity due to the corona virus induced recession. The expansion in ZWL terms is due to money creation which is mostly inflationary, and the inflation is reflected in the exchange rate. High ZWL values are responsible for creating the Nominal Confusion whereby the average person might think that the banking sector and the economy are expanding given the higher volumes when they actually contracting.
2. Balance Sheet Structure
The proportion contributed by deposits is fairly consistent throughout the period around the region of 56%. Even though the level is low, it shows some stability on the sources of bank funding.
3. Deposit Base
The deposit base is contracting in real terms but due to Nominal Confusion the ZWL figures will reflect an increase. The decline in May from USD 752 million to USD 721 million is not worrisome as it does not reflect disinter-mediation but rather currency depreciation.
4. Foreign Currency Funding
There was a sharp decline in foreign currency funding from USD 64 million to USD 56 million which reflects increased unavailability of funds from foreigners for the commercial banking sector.
5. Loans and Advances to Government and Government Securities
Central Government, Local Government and Public Enterprises borrow from commercial banks. Public Enterprises redeemed the securities that were held by banks in February. Government securities held by banks increased in ZWL from 3.9 billion to 4.4 billion and subsequently dropped to 4.2 billion in April. There were no further net purchases of government securities by banks in May.
The chart above represents all borrowings by the public sector from commercial banks.
To summarize changes from April to May:
- Government securities held by banks did not increase
- Public Enterprises securities held by banks did no increase
- Loans and advances to the government by commercial banks increased slightly by 0.1 billion
The government is not a net producer of value. It is primarily a net consumer of value. Value is, by and large, created by the private sector and the government thrives on taxing that value and delivering a few critical services that allow the public sector to generate more value. When the banking sector lends to the public sector, the private sector is deprived of such funds.
The primary source of ZWL liquidity is embodied in the chart above. When government borrowing from commercial banks increases, ZWL money supply increases as well and the exchange rate shoots up.
An example is necessary. Let’s say the Treasury Account for the government of Zimbabwe at CBZ has $0.000 dollars and they want to pay government salaries worth ZWL 0.5 billion. The government raises ZWL 0.5 billion by writing on a piece of paper that they want to borrow. They call the piece of paper a Treasury Bill and give it to the Reserve Bank of Zimbabwe to auction. The RBZ auctions this paper to banks. Let’s say CBZ buys the piece of paper. In CBZ’s books, they credit the government’s bank account and suddenly the government can pay salaries. The corresponding entry is a debit on their asset side, generally government securities, specifically Treasury Bills. The process is what economists refer to when they say banks have the ability to create money via the fractional reserve banking system. Its all numbers in a ledger somewhere. Its electronic digits.
The government can now spend ZWL 0.5 billion. Where do you think CBZ got the funds from?
It is great that total government borrowing has remained constant for three consecutive months. Over time, all other factors such as confidence level held constant, the exchange rate should stabilize around a certain level.