Mangudya must jump into action

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RBZ Governor John Mangudya

The Reserve Bank of Zimbabwe (RBZ) this week announced that government has plans to secure US$200 million from the Africa Export and Import Bank to ease the liquidity constraints buffeting the economy.

Zimbabwe Independent Comment

The central bank, which has of late denied the gravity of the problem, now admits the major driver behind the current cash shortage is the low balances in bank nostro accounts. One can only hope that this admission will lead to a well-thought-out solution to the crisis.

While plausible on face value, this arrangement with the regional bank could only be piecemeal intervention given the myriad of issues confronting the economy. Under the multi-currency regime, commercial banks are responsible for importing cash, and can only undertake this function if they have adequate funding available in their nostro accounts to purchase notes for their clients.

Banking institutions have in recent months witnessed increased pressure on their nostro accounts because Zimbabwe is now a net importer due to a wave of company closures and a dramatic fall in production. This has resulted in banks being unable to import cash to meet their clients’ demands and properly perform their financial intermediation role.

This situation, characterised by a trade deficit, huge balance-of-payments gap and widening current account deficit, prompted the RBZ to increase the percentage amount that banks could keep in their nostro accounts from 5% to 10% of total deposits.

The depletion of nostro accounts held by local banks has resulted in increased bottlenecks in international payments. With a drop in demand, especially due to China’s slump, depreciating regional currencies and weakening commodity prices on the international market, countries which rely on primary commodity exports like Zimbabwe are in trouble.

Meanwhile, the economy is imploding. While there is need for an urgent stimulus package to rescue the economy, more structural reforms and new funding are urgently needed to stop the haemorrhage.

The liquidity crunch is symptomatic of structural problems rocking Zimbabwe’s floundering economy. Confidence in the financial system is currently at a low ebb. Exports have been sagging, while government is fuelling imports, undermining exports and failing to re-ignite industrial activity. Zimbabwe’s economy now has to deal with nearly 10 currencies as legal tender. Authorities had hoped this basket would change liquidity and trade dynamics.

The Chinese yuan, the Indian rupee, the Australian dollar and the Japanese yen have joined the greenback, the South African rand, the British pound, the euro and the Botswana pula in circulation after a shortage of cash in the formal economy left many businesses in a lurch. But that has not stimulated trade and improved liquidity.

The multi-currency regime and political stability led to an economic rebound between 2009 and 2012 before economic problems resurged. What Zimbabwe needs is a cocktail of monetary and fiscal policy measures anchored on confidence-building initiatives, reforms and new funding. It’s time RBZ governor John Mangudya and authorities to bite the bullet of reform and change.

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