Liquidity crunch: A flashback to 2008

WANANCHI, the Oxford Concise Dictionary defines the word hubris as excessive pride or self-confidence.

Wananchi on Friday Tendai Biti

In the first 100 days of the new Zanu PF government after elections, the citizen has seen a lot of hubris, but which is hollow and unfounded. There has hardly been any second for a honeymoon or a little moment for celebration. Not that there was ever reason for it. One does not celebrate stolen spoils.

But it has been an incredible 100 days that has invited an intense debate of the ability of the “Revolutionary Party” to govern. So far it has failed the test.

It is far too easy to rig an election, but there are other things — the economy and the welfare of the people — that are beyond the shenanigans and dirty clutches of Nikuv. The “Revolutionary Party” will know this.

In the last three months, chickens have been coming home to roost, with excuses fast disappearing — there is no more MDC to blame or even to help them out.

The tired gerontocracy — a form of oligarchical rule in which a polity is run by leaders who are significantly older than most of the adult population — is thoroughly exposed in the full glare of publicity, and no amount of liposuction or botox can hide the reality of the present socio-economic situation in the post-election period.

We have a serious crisis, an extremely bad crisis of governance, crisis of legitimacy and a crisis of expectation rocking the economy and the country.

Even for a party that has had more than nine lives, for a party that has been heteromorphic, that is able to change and shift into anything and everything at the same time, the sense of foreboding is nigh. The feeling that indeed after the victory party there could be no ruling party is growing.

Never mind internal canibalisation, indeed the cost of closed-minded insularity, the critical issue is the economic tailspin dogging the country. All is not well in the state of Rome.

The past few months have seen a massive evaporation of business confidence, productive activity and collapse of economic recovery which had begun in 2009.

That 300 workers are being retrenched a week alone is a sign of the massive contraction of the economy and its attendant decline.

Retrenchments, company closures and capital flight have been a consistent feature of the post-election period. That trend has been confirmed in the form of serious reductions in revenue being collected by government, the exponential accumulation of domestic arrears and widening balance of payments position.

Many will wonder why when all other indices are deteriorating, inflation is in fact on the decrease. The simple truth of the matter is that often when there is no economic activity, when domestic demand collapses, inflation, in fact, recedes. It’s called stagflation.

Zimbabwe is in middle of this phase right now. It is a phase of inertia.

The state of the balance of payments makes Zimbabwe appear like some economic backwater or a little tinpot outpost of economic mismanagement. There has hardly been any meaningful capital inflows after the elections, and instead capital is jumping ship in full flight. So the capital account is in distress.

But it is the current account that is in a mess, reflecting the deep structural nature of the present crisis. This is no temporal aberration.

Up to August, imports have been around US$5,6 billion against exports of US$2,3 billion, resulting  in a trade deficit of roughly US$3 billion. Experts like John Robertson calculate that at least US$12 million per day is being funnelled offshore to finance imports. The state of the country’s current account is what physicians would call permanent haemorrhaging.

It cannot be patched up overnight. It is a structural problem reflecting a collapse of the productive sector. It is a supply-side issue demanding supply-side solution.

Tied to the desperate balance of payments problem is the current liquidity crunch. There is no money in the banking system and the economy.

Banks are over-lending to the extent of loan-to-deposit ratios well above 90% and non-performing loans scaling towards 15%. The liquidity crisis is so bad that there are echoes of 2008.

Banks are now limiting cash withdrawals, telegraphic transfers are now taking longer and cash at ATMs is scarce for big banks while totally unavailable for smaller ones. The critical liquidity situation is both a monetary and fiscal crisis.

As a monetary issue, it reflects the challenges of dwindling amounts of broad money supply (M3) in an economy where seigniorage or quantitative easing is impossible. That is why in some quarters they are now embarking on an ill-advised and suicidal call for the return to the Zimbabwe dollar.

But the bottom line is the liquidity challenge is less a monetary issue than it is a fiscal issue. There is no production; there are no meaningful exports, so naturally there is no liquidity and wealth being created.

We are hunting and catching a mouse, but feasting as if we have killed an elephant.  It simply does not work — you must eat what you kill!

These macro-economic challenges pale into insignificance when measured against the scale of other broad problems which need redress and urgently so. These are troubles of unemployment, the shortage of water and power, wage bill, agriculture revival, domestic debt, sovereign debt, de-industrialisation, collapsing social services, lack of foreign direct investment, lack of domestic savings and systemic banking sector vulnerabilities, just to name a few.

The Zimbabwe Agenda for Socio-Economic Transformation (ZimAsset), just another empty economic blueprint, will not address these problems.

What is needed beyond these vacuous blueprints is serious reflection required to resolve these structural issues and come up with lasting solutions.

Herein lies the problem: The real and biggest challenge facing the nation is leadership. There is dearth of leadership with the craft-competence and vision to tackle the present challenges.

What does this mean? It means the present tumbling of the economy is a vote of no confidence in the new post-election government by investors and the markets, and inevitably citizens. What is the solution? It is both a political and economic issue. Government needs to start focussing seriously on these issues before it’s too late.

Biti is MDC-T secretary-general, former finance minister and lawyer.

14 thoughts on “Liquidity crunch: A flashback to 2008”

  1. lovemore says:

    If all sectors of the economy are downsizing, why cant the civil service be downsized as well and channel the funds to productive sectors who create the money to pay the civil servants.

    1. African Warrior says:

      Lovemore, downsizing the civil service might mean retrenching some teachers and nurses. Do we really want this??

    2. N says:

      Thats true even in UK , USA they are downsizing the civilservants.

  2. Tsanoz says:

    @Lovemore, that is easier said than done i.e political suicide. But as we know, this government is not able to make the tough decisions that are required in our current situation and therefore politics of patronage, which are always myopic will tend to prevail.

  3. joe cool says:

    I didn’t notice Biti trying before the elections to do anything about the ills he now complains of. Mismanagement of Zimbabwe’s economy is common to both Zanu PF and MDC, and we haven’t suddenly gone downhill since 31st July – it was coming anyway. All the MDC was relying on to ‘save the economy’ was anticipated handouts from Western governments.

    The temporary perceived economic stability that came in 2009 was thanks to the stability of the US dollar – not to the MDC.

    Biti should also stop being patronising and pretending that he is a dictionary. He would do better to concentrate on improving his grammar which is pretty poor for an attorney.

  4. masenjana says:

    joe cool, you seem to hate facts. what happened to the stock market on release of the election results.your grammar may be cool, but you are still an idiot, boss

  5. Paradzai Tirivashoma says:

    Gandanga riri kutonga Zimbabwe yaro!

  6. godfrey gudo says:

    Biti is a gloom and doom merchant! His articles sound hollow everyday – they are full of anger!

  7. Chabwino says:

    face the facts guys. This current govenment is not old enough to make unpopular but necessary decisions. That was one thing that Biti was good at. I hope by delayiong the budget they are not trying to Nikuv it which they will natuarlly fail

  8. African Warrior says:

    Well Patriot Biti, you seem to circumspect the main problem. The real problem is that this country is not being ruled by patriots, but by greedy mercenaries who were once patriots. They design their policies with their personal gain in mind, even when such policies are a threat to the national economy. The flight of capital should come as no surprise in an atmosphere where investiments are not secure? Who will bring in his US$100 million only to be told that we are taking over US$51 million and we will leave you with US$49 million? While noone has said these words directly, our polices on indeginisation mean exactly this, for non-chinese investors.

  9. Honai says:

    Ah Mr Biti again comfortably ensconced in his self righteous chair and doing what he loves most. Complaining. While he eloquently tells us the state of our present predicament, he remains true to his opposition roots by proffering no solutions what so ever, outside of telling us to be rid of our present political leaders. How self serving is that???!! Until we can have a discourse where individuals do not restrict themselves to blaming others and face up to accepting that, we are all complicit in this dastardly state of affairs then we might as well just starting digging our graves regardless of age.

  10. zimbabwean says:

    We are even exporting hard cash to mainly South Africa, individuals who visit S.A to buy household items i.e stoves, beds, TV’s, not that they are to be blamed since its cheaper and of higher quality than the locally produced goods. The thing is that these individuals are taxed twice, the VAT charged in S.A is hardly claimed back, then one has to pay custom duty on these goods.In as much duty has to be paid to Zimra. I think we should have a mechanism where its easier for the individual to have the taxes paid in S.A to be remitted back.My opinion is that Zimra as the tax authority should bear the responsibility of claiming the taxes paid by individuals in neighboring countries. I do see tedious work here but i believe it is worth it, this can surely save Zimbabwe millions. Instead of one paying the full duty on their imports they make, Zimra has to deduct the VAT paid in the country of origin, engage the Tax authorities in these countries to claim the taxes. Zimra can still charge a fee for its work. This i want to believe can even encourage people to declare all they are importing reducing smuggling and save Zimbabwe large amounts of money. ( VAT in S.A is about 17% and the figures that we have of imports are to high to ignore what we are losing) I think in the end this can go a long way in reducing the liquidity challenge.

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  12. Musoja says:

    Probably with the state we were in the current gvnt needs more time to really identify and strategise on way forward. I believe nothing much can be achieved in 3 months other than sychronising all economic fundamentals for implementation. The budget is one clear example. Its no use announcing it without the necessary consultations because it has to touch on the urgent critical fundamentals to kick start the economy. The only major undoing for the current gvnt is their policy inconsistencies which scare away potential capital inflows. Its time for serious action and less talk shows.

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