Cash crisis reflects low confidence in economy

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The ongoing cash crisis in Zimbabwe reflects deep-rooted economic challenges that have not been addressed. The cash crisis is more than just a liquidity crunch, but rather a reflection of a crisis of confidence in the economy and deep underlying problems. It’s a symptom of fundamental structural problems, not the problem in itself.

The Ritesh Anand Column

RBZ Governor John Mangudya

RBZ Governor John Mangudya

Since 2013, the economy has been in free-fall and little has been done to address key economic issues. Falling commodity prices combined with a strengthening United States dollar have created significant challenges for the economy. Growth has stalled and there is urgent need for government to focus attention on the economic woes facing the country. I have written about this on numerous occasions since early last year. Sadly, it appears to have fallen on deaf ears. Perhaps the current cash crisis will prompt government to take positive and meaningful action to deal with the real issues.

While the Reserve Bank of Zimbabwe has done all it can to restore confidence in the financial system, the sharp slowdown in economic activity is beyond the control of monetary authorities. Fiscal policy is restricted partly due to the dollarised economy, but also by the fact that we spend over 80% of our budget on salaries for civil servants.

The collapse in economic activity this year is likely to impact on tax revenues and ultimately the budget. While tax revenues have remained robust throughout 2015, this year has not generated as much revenue for government as anticipated resulting in the liquidity challenges facing the country.

Liquidity challenges create a vicious cycle leading to a crisis of confidence and ultimately a run on the banks. We need to break that vicious cycle. So despite the best efforts by monetary authorities to restore confidence in the banking sector, fear of not being able to access your cash can trigger a run on the banks.

In 2008, a bank rescue package totalling some £500 billion (approximately US$850 billion) was announced by the British government on October 8 2008, as a response to the global financial crisis. After two unsteady weeks at the end of September, the first week of October had seen major falls in the stock market and severe worries about the stability of British banks.

The plan aimed at restoring market confidence, help stabilise the British banking system and provide for a range of short-term loans and guarantees of interbank lending, as well as up to £50 billion of state investment in the banks themselves. Subsequently, broadly similar measures were introduced by the US and the European Union in response to the financial crisis.

Sadly, these options are not available to Zimbabwe in a dollarised environment nor do have such reserves. We would have to rely on international support which is unlikely to be forthcoming given our outstanding debts.

To be clear, the issue is not dollarisation, but rather the lack of clear and consistent policies to stimulate economic growth and activity. If you are going to use the currency of one of the strongest economies in the world, then you have to align your economic policies with international best practices.

While historically Zimbabwe has always pursued its own economic path that ultimately led to the death of its own currency, dollarisation forces you to be more disciplined and follow traditional economic models for growth and development.

I have often argued that dollarisation provides Zimbabwe with a competitive advantage in the region given the recent collapse of local currencies across Africa. Countries like Zambia and Ghana have seen their currencies collapse in the last year unnerving investors in the process. Zimbabwe does not face such currency risks post-dollarisation. Sadly, we have failed to create a conducive environment to attract investment and leverage the dollarised environment.

The cash crisis is likely to get worse if government fails to address key economic structural issues. The restrictive measures announced in the Monetary Policy Statement in January 2016, as well as the delays in settling international payments has led to heightened concerns. In an economy that has become so informal in recent years the use of plastic cards is not the solution. Zimbabwe is a cash-based economy and any restrictions on its flow is likely to create havoc.

Restricting imports, internal devaluation and debt restructuring are all medium to long-term solutions. What Zimbabwe needs most is policies that restore confidence in the economy. Clear, consistent and investor-friendly policies that stimulate growth and economic activity are critical to avert a full-blown economic crisis.

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