Tapiwanashe Mangwiro
The Governor of the Reserve Bank of Zimbabwe (RBZ), Dr John Mushayavanhu, has clarified the rationale behind the recently launched Targeted Finance Facility (TFF), emphasising the facility is just a tool to redistribute existing excess liquidity rather than create new money.
Speaking in response to questions posed by the Business Weekly about why the central bank opted for the TFF instead of reducing the statutory reserve requirement, currently set at 30 percent, Dr Mushayavanhu dismissed concerns that the facility could be inflationary.
“It does not follow that banks are going to lend more if statutory reserves are reduced. Most of that money would find its way to the parallel market. The problem is not that there is no liquidity in the market. That’s where you are getting it wrong,” Dr Mushayavanhu said.
According to the Governor, the market has been experiencing excess liquidity, with daily surpluses exceeding ZiG1 billion since September.
To prevent this surplus from fuelling inflation or destabilising the exchange rate, the RBZ has been sterilising the funds through Non-Negotiable Certificates of Deposit (NNCDs) at zero percent interest.
“We are having to sterilise that excess liquidity through NNCDs at zero percent interest every day,” he noted.
Dr Mushayavanhu stressed that the TFF is designed to address structural issues in the interbank market rather than supply more money into the financial system. He pointed out that the main challenge lies in the uneven distribution of liquidity among banks.
While some institutions are flush with excess funds, others lack the liquidity to meet lending demands. However, instead of lending to each other at the policy rate or higher, many banks are choosing to park their surplus funds with the RBZ at no interest.
“The problem is that banks are not trading with each other. There is liquidity concentration in a few banks. In a normal money market, banks that are long should lend overnight or even over 30, 60, 90, or 180 days to banks that are short at the bank policy rate or higher against security. For reasons best known to the banks, this is not happening,” he explained.
Under the TFF, the RBZ is taking the sterilized funds from NNCDs and channelling them to banks that may not have surplus liquidity but have legitimate customers with borrowing needs. Dr Mushayavanhu emphasised that the facility ensures funds are directed to the productive sectors of the economy, avoiding the risk of money supply growth.
“So under the TFF, we are taking the money we have sterilised via NNCDs and lending it to those banks that are square but have bona fide customers who want to borrow. That way, we can support the productive sector without increasing money supply,” he added.
Dr Mushayavanhu expressed frustration with some banks’ reluctance to engage in interbank lending, which he described as an essential function of a healthy money market. He highlighted the paradox of banks preferring to park their excess funds with the RBZ at zero interest instead of lending to other financial institutions and earning returns.
“Surprisingly, instead of lending to the bank next door and getting interest income, some banks are content with RBZ taking their excess funds and parking them in NNCDs at zero interest. So we are just redistributing the excess ZiG via the TFF,” he said.
The governor reiterated that banks must demonstrate a pipeline of borrowing customers to access the facility. This approach, he argued, ensures that the TFF achieves its intended purpose of supporting productivity while maintaining monetary stability.
