Companies are directly affected by the shortage of cash on the market as they have to borrow at very high rates thereby increasing operational costs.
Government, the major player on the money market, has largely been absent and the balanced budget approach means it is unlikely to borrow.
The country therefore has to wait until government starts borrowing and undertaking major capital projects.
Capital projects by government play a very important role in the economy as they increase the ease of doing business. Immediate needs in the country include infrastructure, power and energy supply as well as other utilities where government plays a significant role and require huge capital outlay.
It was expected that the tobacco selling season, the traditional cash cow that improves the liquidity in the market, would ease the problems but after two months, it appears its role has been peripheral at most.
Traditionally the tobacco selling season is the country’s period of abundance as merchants splash millions of dollars which would supplement money which is already in circulation.
Economic analyst John Robertson blames the liquidity problems on government policies which “discourage the inflow of funds into the country”.
“This means that the government would not be able to undertake any capital expenditure under the balance budget and it is not possible to improve the efficiency of the local companies,” said Robertson. “Government would not be able to improve power generation at Zesa and other utilities which means that local companies will be less efficient (as a result of the huge operation costs) and the country will be an unattractive investment destination for everybody, including Zimbabweans.”
This explains why local investors choose to operate from neighbouring countries including Zambia and Mozambique.
Government plays a significant role on the money market as it issues various bonds which are then traded among players in the financial sector.
There are two reasons why government cannot play any role on the money market at the moment: A very low credit rating and the dryness of the market at a time when it is unable to print any notes.
Robertson said the country is doing the opposite of what it should do by gazetting laws such as the Indigenisation and Empowerment Regulations which dampen investment as an investor may lose 51% through a piece of legislation.
An analyst at ZB Financial Holdings concurred saying the liquidity problems have been made worse by the “shaky political environment and uncertainties caused by the gazetted Indigenisation and Empowerment regulations”.
“The environment that prevails dampened investor sentiments thereby limiting activity on the money market,” said the analyst at ZB Holdings.
The analysts said apart from the tobacco selling season, which started in February, anticipated diamond sales, gold sales, donor inflows and related exports were the likely sources of funds which would ease the liquidity problems.
“Their overall impact on reduction of high interest rates is likely to be limited, as demand for funds across the whole economy continues to outweigh supply,” added ZB analysts.
Interest rates are currently very high, at around 12%, making borrowed money very expensive.
Local companies borrowing at 12% would not be as competitive as those getting money almost for free at between 0, 25% and 0, 9%, which is the prevailing rate internationally.
In a normal situation, many international financial institutions would have rushed to lend in Zimbabwe, where they get high return but there are many factors which make it less attractive.