HomeEntertainmentEric Bloch: Liquidity crunch hinders economy’s recovery

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IT is indisputable that the Zimbabwean economy is recovering. 

The state of the economy today is significantly different to that which prevailed a little over a year ago. However, it is also indisputable that the economic recovery is a very long and slow one, and that there continues to be much which continues to ail the economy.  It cannot be credibly contended that the economy has fully recovered, or even that the recovery so far achieved is considerable in extent, when over 85% of the population struggle to subsist on incomes below the poverty datum line, and more than half of the population is under-nourished and suffering pronounced malnutrition, with incomes below the food datum line. The harsh fact is that when an economy has been whipped and beaten for over 12 years, it cannot be transformed overnight.
Of the innumerable constraints upon economic recovery, one of the foremost ones is the scarcity of resources within the money market.  In relation to the economy’s needs, funds within the majority of the banks and other financial institutions are minimal. Almost every entity within commerce and industry, the mining and tourism sectors, and other economically engaged, has a critical need to access funding. Many of them have a substantial asset base, including properties, plant and equipment, and other assets, but have a grievous lack of working capital, let alone the capital necessary for the refurbishment, rehabilitation, replacement and upgrading of those assets.
This lack of working capital, for most, was occasioned by very considerable operating losses in 2008, when the extreme hyperinflation (greater than ever previously experienced, anywhere in the world) not only eroded consumer spending power and therefore greatly reduced sales volumes for most enterprises, but also increased operational costs  exponentially.  Thereafter, capital resources were further extensively diminished by the demonetisation of Zimbabwe currency.
The demonetisation was very necessary, in order halt the hyperinflation, and for other reasons, but nevertheless also had the very negative consequence of further decimating the working capital available to Zimbabwean enterprise.
Although, in 2009, the manufacturing sector of the economy experienced a relatively impressive growth in productivity, from under an abysmally low of less than 10% of capacity, to approximately 40%, that was still far short of needed productivity levels to attain comprehensive economic recovery. Similarly, most other economic sectors (with the very prominent exception of agriculture), did not realise fully their potential, albeit that they did experience some growth, whilst no significant growth was attained in agriculture.
In order to achieve such potential, virtually every enterprise has a chronic need for working capital injections. The funding was (and continues to be) necessary to enable timeous purchase of operational inputs, to effect payment of wages and other operational costs, and in order that customers could be accorded credit terms. Provision of credit has generally been a prerequisite for enhanced sales, as wholesalers, retailers and other distributors have been as greatly subject to cash availability limitations as were, and are, their suppliers. 
Where normal economic circumstances prevail, businesses in need of working capital either seek funding from investors, or resort to the money market. However, there are very few in the domestic market as have the cash resources to effect investments, and the limited numbers that are so possessed very understandably seek investments which are on exceptionally favourable terms, exploiting the fact that there are more in need of investment than there are investors. This, of course, is a major deterrent to those who are soliciting investment.  Foreign investors are also presently few and far between.  Although there has been a great influx of foreign investors evaluating opportunities and potential in Zimbabwe, most are not yet willing to effect the investments, whilst they are poised to do so as soon as they consider that the right investment environment prevails.
They perceive the prerequisites of such environment to include political stability (the first step thereto being the belated full implementation of the Global Political Agreement and real progress towards formulation and adoption of a genuinely democratic constitution). They also require that there be genuine, evident, respect for property and human rights, and for full implementation of law and order, concurrently with unequivocal commitment to Bilateral Investment Promotion and Protection Agreements.
With there presently being limited opportunity to procure working capital through recourse to investment funding, most desperately pursue the alternative of seeking finance from the money market. But, with a few exceptions, the market has relatively minimal resources. On the one hand, the market’s ability to access international lines of credit is immensely restricted; for most potential providers of such credit facilities apply the same criteria as do foreign investors, in assessing the risk factors. Those criteria presently deter most from providing credit lines, for the perceptions are (validly) that political stability does not yet exist, and that there is recurrent evidence of absence of respect for property and human rights, and for law and order. In such instances as limited facilities are granted to the money market from abroad, they are generally of very short duration.
On the other hand, inflows into the money market from local sources are also considerably less than required to enable provision of working capital needs to Zimbabwean enterprise. The amount of money in circulation is extremely small, as compared to that required for a virile economy. This is exacerbated by the extent that the populace in general and businesses in particular, do not use the banking system. Aware of the extensive scarcity of currency, many are fearful that if they deposit their inflows into the banks, they will not thereafter be able timeously to withdraw them as and when required.
In consequence, the financial sector is under severe constraints in making advances to the Zimbabwean enterprises which necessarily crave working capital injections. Moreover, to such limited extent as the banks and other financial institutions are able to make facilities available, they commit themselves to the provision of those facilities for exceptionally short periods of time. This is usually of little benefit to intending borrowers, for the funds are required for a sufficiently long time to source and obtain of inputs, to use those resources, effect deliveries of the resultant outputs, and receive payment for those deliveries.
Whilst there are still a divers range of economic recovery obstacles, most of which require political will to resolve, the straitened circumstances of the money market is a major one of those obstacles. That market’s illiquidity greatly hinders Zimbabwe’s economic recovery, and must be very urgently addressed.


Eric Bloch

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