Eric Bloch Column

Practical solutions to cash crisis


By Eric Bloch

THE monumental scarcity of cash within the formal economy that prevailed in November and December was not the first to be experienced by Zimbabweans. However, it was c

ertainly the most pronounced.


Despite the levels at which the Reserve Bank of Zimbabwe restricted cash withdrawals being relatively minimal, even before the cash crunch commenced, the availability of bank notes was at times so limited that banks could not even service requested cash withdrawals at such levels. Instead, they had to ration the issues of currency as severely as Zinwa has restricted water supplies in many Harare suburbs, for they simply could not issue that currency which they did not have.


Although RBZ had hoped to resolve the crisis before Christmas, that did not occur, but within the week after New Year it finally abated, with the previously gargantuan queues of people desperate to access their money shortening.


This was achieved, albeit belatedly by enhanced supply by RBZ of currency into the economy, by the very impressive, vigorous efforts of the commercial banks to meet the anxious needs of their customers, keeping the banking halls open until late each day, and throughout a weekend, and by diminished post-festive demand of cash by the manufacturing sector that is in recess.


However, as the issue of new $250 000, $500 000 and $750 000 bearer cheques, and the remonetisation of the $200 000 bearer cheques increased currency availability, improved also by heavy deposits by holders of the then to be demonetised currency, and alleviated the crisis, care must be taken that complacency not set in. If it does, future cash crises are not merely probabilities, but will be certainties, and probably with ever-increasing frequency and intensity.


RBZ attributed the massive shortages of currency to the accumulation and hoarding of money by those dubbed cash barons, and it is incontrovertible that this was occurring, to some considerable extent, and was a major factor in the development of the money scarcities.


The cash barons comprised, in the main, those engaged in the unlawful purchase of foreign currencies, either in order to externalise assets, or to fund imports, and others intensively engaged in cross-border trading operations. Other cash barons were retailers who found that they could realise substantial extra profits by not banking their sales receipts, but instead accumulating the cash to sell it, at a premium, to those in desperate need.


But, without minimising the impacts of the activities of the cash barons, there were other, markedly greater causes of the cash shortages. First and foremost was the rampantly spiralling hyperinflation that afflicted Zimbabwe throughout 2007.


By December, 2007 the consumer required 20 to 30 times as much money to buy exactly the same goods, in exactly the same quantity, as he or she needed to have only one year earlier. Thus, if on a visit to a supermarket a year ago, the customer needed to $2 million in cash, by December, 2007 at least $40 million, and up to $60 million, was necessary to buy no more than had been purchased for $2 million only 12 months previously.


Extrapolate that increased currency need by several million purchasing consumers, and the total cash needed by that buying population exceeds all currency in circulation! Admittedly, some customers pay for their purchases by cheques, or with credit cards, but the masses of the low-income earners and those who reside in rural areas, cannot access or afford banking facilities.


Therefore, it must be realistically assumed that at least a half, if not more, of the total currency that was in circulation was, at any time, in people’s wallets, purses, handbags, pockets, or homes, solely in order to fund ordinary consumer needs. The total cash in issue was, according to RBZ, about $67 trillion, and therefore at least $34 trillion, and probably very much more, was in the hands of consumers, for wholly legitimate purposes, at any time.


A further key factor is that, at the present time, the most virile facet of the Zimbabwean economy is the informal sector. With unemployment being endemic, the majority of the population has little or no alternative but to resort to informal sector activities, ranging from vending at bus termini, at people’s markets, and elsewhere, to provision of diverse services, cottage industry operations such as production of clothing, and to numerous forms of unlawful activities such as gold-panning and other criminal actions.


A key characteristic of informal sector operations is the preservation of a low profile, beyond the gaze of taxation, licensing and other authorities. One way of doing so is by not operating banking accounts, processing all transactions in cash, and accumulating cash receipts to fund outgoings. Hence, there were undoubtedly many trillions of dollars held by informal sector operators.


The magnitude of the monies held by the general public, for no untoward reasons, and by informal sector operators, will undoubtedly have considerably exceeded the undeniably considerable sums held by the cash barons.


This was convincingly demonstrated by the horde of anxious and desperate ordinary men and women, almost panic-stricken, queuing for days and nights outside banks and building societies, fearfully striving to convert their $200 000 notes before they became valueless.


Others, in a similar state of stress, fearing intensified poverty due to the impending demonetisation of their few bank-notes, rapidly spent their monies on goods which normally they would not have purchased, or would only have done so progressively over the days, weeks and months ahead.


The tragedy is that all these causes of the cash crisis of late 2007 will recur, within a few months, unless the underlying causes are rapidly and constructively addressed. Doing so requires that:


lWithout delay and without recourse to its endless misconceived, erroneous assumptions as to the causes of Zimbabwe’s hyperinflation, but with unequivocal recognition of the real causes, government must forcefully address those causes.


lThis requires drastically reducing its expenditures, very substantially moving exchange rates so as to stimulate export operations and concomitant foreign exchange generation, so as to curtail the inflationary-stimulating parallel foreign currency markets, enhancing infrastructural service delivery so as to restore productivity to industry, agriculture, mining and other economic operations, as well as many other constructive inflation-containment measures as have been frequently identified to government, and as frequently ignored.


lAs rapidly, government needs to terminate the operations of the National Incomes and Prices Commission, which operations are the greatest cause of the gargantuan commodity scarcities in the formal economy and, therefore, of much of the growth of informal sector operations, and of black market-driven inflation. As long as commodity supply cannot match, or exceed, supply, prices will inevitably escalate, and especially so in the unofficial markets. Instead of counterproductive price controls, a government-led unity of state, business and labour needs to bring into being, voluntarily, a very long overdue, positive, workable, social contract.