Zim banks have created 800 million Electronic US dollars!
Don’t ask me how they managed to do this?
The dollars have already been created. The damage is already done. A relevant question to ask is: What shall we do with those balances?
Maybe it is necessary for me to first prove that 800m US dollars have been created by the local banking system. That is relevant, and I am happy to help.
The first port of call would be to look at the quantum of USD balances we have in the banking system. We then compare this with the quantum of real US dollars in the system. For the quantum of USD balances, we can look at the FCA balances as a proportion of the broad money supply, M3.
As of May 2022, broad money stock stood at ZW971 bn and 57% of this was foreign currency deposits. We also know that the rate used to translate these FCA deposits into a ZWL figure at the end of May was 308. Thus, we get a figure of US$ 1.8 bn worth of FCA deposits.
The follow-up question is: do banks really have this figure on their balance sheets in the form of pure USDs? It’s obvious they don’t have all of it. The figure circulated in the streets is a billion, giving us a shortfall of US$ 800 m. We will find out when the full data for May has been released. In the meantime, we can actually look at the data for April.
The easiest place to look at is the Combined Balance sheet for all commercial banks. RBZ publishes commercial banking assets and commercial banking liabilities every month. These aggregates can be combined into one balance sheet for all commercial banks. Below is a snapshot of the balance sheet.
We are interested in the line items highlighted in green. For a bank, the real USD assets are Cash USD and real Nostro. Cash USD is the line item referred to as Foreign Notes and Coins. Real Nostro is the line item referred to as Balances with Foreign banks. These are real US dollars that have originated from the United States. Banks are holding 1.1 billion real US dollars.
The 1.1 billion is made up of US$736m worth of real Nostro and US$441m in cash.
Wait, I have just told you that banks in Zimbabwe are holding US$400m cash in their vaults.
I am not responsible for what you choose to do with this information.
If we are to compare the US$1.1 billion prevailing in April, with the FCA deposits worth US$1.8 billion prevailing at the end of May, we can see a mismatch of 800m. Since we cannot cross-compare months, we can rely on solely April data.
In April, RBZ said FCA deposits constituted 45% of Money Stock. Their April figure for Money Stock was ZWL 671 billion. Using the combined Commercial Banks Balance sheet, we get a figure of ZWL 715 billion because we add balances of other depository corporations and other commercial bank liabilities. These are effectively broad money. 45% of this ZWL 715 bn is ZWL 322 bn, which is the FCA deposits. Using the rate to get back to the actual USD, we arrive at US$2bn. This US$2bn is larger than the US $1.1 bn held by banks, giving us a shortfall of US $848m, shown below.
Notice the difference between the US $2 bn worth of FCA deposits as of April 2022 and the $1.8 bn we derive from the Money Stock reported figure for May. The difference is due to us handpicking components of the Commercial Banks balance sheet.
If we are to use the April reported M3 figure of ZWL 671 billion, we get US $ 720m as the value of locally-created US dollars.
Notice that we have excluded one line item from the analysis. It’s the balances that commercial banks hold at the RBZ. These balances can either be FCA or ZWL. If we assume that these balances are 100% FCA, we get a figure of USD900m, which is enough to cover the locally created US dollars.
If we assume these balances are 45% FCA, then we get a figure of US $408m, which partially covers the locally created US dollars.
But we know for a fact that these balances that commercial banks hold at RBZ are not 100% FCA amounts, and the ones that are FCA denominated are not true US dollars. Hence, we do not include them in the true USD calculation.
Once upon a time, these balances were true USD, and banks could easily move funds between cash in the vault, Nostro, and RBZ balances. Banks could instruct RBZ to move funds from RBZ to Nostro, e.g., funding a Stanchart New York account.
But, as it is now, we know the balances are not true USD. How do we know? We know that the central bank does not have any forex. It is auctioning forex in advance (before they receive it) hence creating auction backlogs.
If the RBZ published its own balance sheet on a regular basis, we would be able to tell how much forex they hold with foreign central banks. This balance would then add to the total of true USD. For now, we assume it is zero. RBZ does not have any forex at the Fed, or in vaults, and does not have any meaningful reserves either. It is a broke central bank.
Besides these technicalities, we already know that balances held at the RBZ are predominantly ZWL balances, not FCA. This is a fact that cannot be contested.
How big is the Problem?
We have US$800m worth of locally-created US dollar deposits out of a total of US$1.8 bn. This means 45% of FCA deposits are locally-created dollars.
This means the USD banking system has almost been diluted by half. The contamination rate is 45%.
For every dollar of real USD, we have created USD 0.72 of our own. Very soon it could be 1:1, meaning for every one real USD, we have one locally-created USD.
Is this really a problem?
Yes, it is a problem that commercial banks have to grapple with. Economic units (individuals, corporates, gvt, etc) say they hold so much Foreign Currency at the banks, and the banks simply do not have that much. Of course, at some point, these economic units have to face reality.
In the meantime, two main problems exist for commercial banks:
- Failure to sufficiently fund the Nostro Account.
- Failure to sufficiently honor USD cash withdrawals.
These two problems have been managed in a commanding way, at the top (central bank level) by simply making it very difficult to make payments to outside entities and making it very difficult for economic units to withdraw cash USD.
If these command ways of managing things were to fall away, we would have a situation where there is only US$ 400m cash available at the banks, and US$700m available at real Nostro versus $2 bn that wants to get out.
In my view, the US$ 800m created locally is a mess. It needs to be resolved now. The situation should not be allowed to persist. If commercial banks continue creating domestic US dollars, we could end up with a financial system pregnant with domestic dollars that end up over-diluting any semblance of the real USD, leading us to the need to do another systemic reset whereby we derecognize all electronic USDs, for them to lose the identity of being USD. This has happened before. If it happens again, it could ultimately kill the banking system, as economic units, burnt twice within a decade, end up totally avoiding the banking system.
Ciao!
