THE recent cash shortages which became apparent in the market at the end of last month and are still being felt reflect underlying problems in the economy which should be addressed holistically. While short term interventions have alleviated the situation, serious measures are needed to find a lasting solution.
Zimbabwe Independent Comment
Due to the cash shortages, most banks had reduced their ATM withdrawal limits to less than US$1 000 a day and in some cases as low as US$300. RTGS payments, however, continued to function well, despite some delays.
Reserve Bank governor John Mangudya said the cash shortages were due to a spike in demand fuelled bonus payments; an unanticipated correlation between the timing of public and private sector salaries and bonuses. He encouraged the use of point of sale systems and plastic money to reduce reliance on cash.
While authorities should be commended for acting fast to prevent a serious cash crisis similar to crippling shortages experienced during the hyperinflationary era – which led to the demise of the Zimbabwean dollar officially demonitised last year – we should not lose sight of the fact that the current liquidity crunch reflects fundamental economic problems that must be addressed comprehensively.
Zimnat Asset Management in a recent research found that the root causes of the cash crunch were linked to local banks’ low nostro bank accounts balances. Germany’s leading international commercial bank, Commerz bank recently closed local banks’ nostro accounts.
Under the current multi-currency regime, commercial banks are responsible for importing cash, and can only do so if they have adequate funding in their nostro accounts. Banks have witnessed increased pressure on their nostro accounts as imports rise against shrinking export revenues and other inflows.
The Reserve Bank has as a result increased the percentage of nostro accounts balances from 5% to 10% of total deposits. These, however, can only be funded from offshore receipts. The marked reduction of inflows into the country against rising imports, hence a huge current account deficit, has over time depleted nostro accounts, compounding bottlenecks in international payments.
Since Zimbabwe no longer has monetary sovereignty following the decimation of the local currency, liquidity sources are now limited. The country’s liquidity situation is now contingent upon exogenous developments. Other than domestic deposit mobilisation, major sources of liquidity include export earnings; diaspora remittances; offshore credit lines; FDI inflows; and portfolio investment inflows. Liquidity is critical to financial intermediation.
The current liquidity crisis, against a background of an economy hit by a worsening wave of company downsizings, closures and retrenchments, reflects are number of underlying economic problems: lack of competitiveness, declining capacity utilisation and production, low aggregate demand, low export earnings, increased banking sector vulnerabilities, and limited deposits and credit availability. This is the vicious circle of liquidity which Zimbabwe must break and can only do so by fixing the economy, not through piecemeal measures and emergency interventions all the time.