Eric Bloch: Illiquidity Slowing Down Recovery

AFTER 11 years of almost never-ending and intense decline, Zimbabwe’s economy has commenced recovery over the last six months.


Although only the first phase of reversal of the near total economic collapse, the extent of transformation has not been insignificant. At the end of 2008, almost the only things in the majority of shops were rows and rows of empty shelves.
Today all the shelves are full, with virtually all basic commodities being readily available, as well as many other goods. And prices have cascaded downwards, with inflation falling from many trillions percent in 2008 to successive deflation from January to May this year, and only 0, 6% inflation in June. Admittedly, notwithstanding the decrease in prices (save for those of parastatals and local authorities), purchase of the goods that now fill the shelves is beyond the means of a very large number in the Zimbabwean population, for pronounced poverty still afflicts a majority of Zimbabwe’s long-suffering people.
There have been many other positive economic developments, including currency stabilisation (although still in short supply), achieved through “dollarisation”, followed by demonetisation of Zimbabwe’s currency. Whilst well below Zimbabwe’s needs, some international aid, additional to humanitarian aid, has started to flow into the country after years of being withheld. Far from the extent needed, Agriculture and Tourism are nevertheless experiencing growth. Progressively, the authoritarian and bureaucratic control by and constraints of government upon the economy are being replaced by deregulation.  Market forces are increasingly becoming economic drivers. And, for the first time in years, some real interest in investment in Zimbabwe is being demonstrated by both Foreign Direct Investors and by domestic investors.
None of these, and many other economic positive developments, can detract from the fact that the Zimbabwean economy is still extremely fragile. At least seven million, if not more, are struggling to survive below the Poverty Datum Line, and more than half of those are grievously undernourished, suffering grave malnutrition, their minimal incomes being below the Food Datum Line. Zimbabwean agriculture has not yet recovered to an extent necessary to sustain all Zimbabwe, necessitating continuing importation of more than a third of the country’s staple food needs.
More than four-fifths of Zimbabwe’s employable population is without formal sector employment. There is a national scarcity of technological and other skills. Parastatal service providers are disastrously unable to address the economy’s needs, the country suffering from immensely frequent, and very prolonged, interruptions in energy supplies, some householders having been without water for many months. Telecommunications are so defective that pigeon post and runners with cleft sticks are more reliable, and many more parastatals are similarly unable to service national needs.  These are but some of the economic recovery constraints still prevailing and, as major as they are, the economy is indisputably attaining some recovery.
Whilst there are many factors that retard economic recovery, one of the greatest ones is the pronounced illiquidity impacting upon commerce and industry, and upon other diverse economic sectors. The working capital resources of almost all enterprises have shrunk to infinitesimal levels. Operational losses during years of economic contraction, concurrently with intense, hyperinflation, severely eroded the capital of most businesses. Thereafter, most of their residual capital lost all value upon the “dollarisation” of the economy (although if “dollarisation” had not occurred, that value loss would still have arisen as a result of the then ever-declining value of Zimbabwean currency). The lack of working capital precludes businesses timeously purchasing adequate quantities of manufacturing inputs and stock in trade. It prevents them from paying adequate salaries and wages. They are unable to extend credit to customers, who in turn do not have the capital to effect cash purchases, most ventures cannot fund adequate maintenance, refurbishment, rehabilitation and replacement of plant and machinery, motor vehicles, and other assets essential to the effective and viable operations of the businesses.
In a normal economic environment, working capital inadequacies are generally addressed by recourse to banks and financial institutions, businesses encumbering assets, ranging from property to plant and machinery, motor vehicles and debtors, as collateral for diverse financial facilities.
According to circumstances and needs, the facilities may be loans, banks overdrafts, bill discount funding, leases, letters of credit, or various other financial products. However, currently, the opportunities of accessing such finance are exceptionally limited. On the one hand, the financial sector as yet has only extremely limited access to lines of credit from sources beyond Zimbabwe’s borders. Lenders outside the country still perceive Zimbabwe to be a high credit risk, partially because the economic metamorphosis is still in its very early stages, and to a considerable extent because of scepticism that there is real and meaningful change within the political environment. The financial institutions have a great need to access international lines of credit, partially because their capital resources have also been eroded, and substantially because of the very considerable funding requirements of their clients.
On the other hand, the institutions are also limited on their lending ability because of the relatively low levels of deposits by their customers. Reactive to the intense scarcity of currency, most businesses are reluctant to deposit receipts, for they do not feel assured of an ability to withdraw funds as and when required, for at such times the financial sector institutions may not have the required currency. This reluctance is compounded by a fear that if monies are deposited, the deposits may be expropriated, in whole or in part, by the Reserve Bank or by government. There are strong recollections of such expropriations in 2008. In addition, the continuing non-availability of chequebooks, and the magnitude of service and other charges levied by the banks are yet further deterrents to depositors.
However, the inadequacies of institutional funding facilities are exacerbated by the very minimal extent to which the institutions are effecting advances from such client deposits as are received and held by them. It cannot be contested that a significant portion of deposits must be held in liquid form to enable disbursements to depositors on an “as and when required” basis. But, for much more than a century, the world over, banks have applied a meaningful proportion of deposit inflows to effecting lending to clients, recognising an ability to service withdrawals from a combination of non-disbursed deposits.
Zimbabwe’s bankers need to be conservative in their operations, but such conservativeness should not be excessive. In the interests of their own viability, their clients’ operations and the progression of economic recovery, they need to reassess their present, non-constructive stance.  Their current policies are fuelling national illiquidity, which is slowing the critically needed economic recovery.

 

BY ERIC BLOCH

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