THE country’s liquidity crisis, which has resulted in the current cash shortages, will persist indefinitely with no short-term solutions in sight, economists have warned.
By Kudzai Kuwaza
Factors such as the country’s unsustainable trade or current account deficit, poor balance-of-payment position as well as massive revenue leakages and an uneven distribution of liquidity in the market are the major reasons behind the liquidity crunch that has spawned the serious cash shortages buffeting the economy.
The situation has in recent weeks exacerbated by the depleted nostro accounts balances which have been drained by the ballooning import bill.
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 Reserve Bank of Zimbabwe (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.
Weakening commodity prices on the international market compounded by lower-than-projected tobacco deliveries against the backdrop of an El Nino-induced drought have reduced export earnings. This in turn has resulted in the depletion of nostro accounts of banking institutions.
A nostro account is a bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions.
The cash shortages have resulted in long queues in some banks as depositors battle to access their cash. It is made worse that this is coming at a time schools are opening for the second term with parents struggling to get money to pay school fees.
Economic analyst and Bulawayo South MP Eddie Cross said only President Robert Mugabe’s resignation could halt the liquidity crisis in the short-term.
“The only short-term solution is an announcement by the President that he is going to retire,” Cross said. “That is the only thing that can jolt the market in the short-term”
He said in the medium-term, the government should restore its relationship with International Financial Institutions to boost the country’s chances to get fresh funding.
“In the long-term we have to put our house in order,” Cross prescribed. “We have to restore the rule of law and restore confidence in the economy and have a democratic election that is legitimate and is not contested in 2018.”
The porous border posts have also fueled smuggling resulting in the country losing millions of dollars.
Externalisation of money from the country continues to be a headache as revealed by RBZ governor John Mangudya in his monetary policy statement in February this year.
Mangudya said the RBZ had put in place stringent prudential measures to plug illicit financial flows, as it emerged that close to US$2 billion was salted away out of the country last year by individuals and companies, worsening the liquidity situation.
Mangudya said money was flowing out of the country worsening the liquidity position of the economy.
He said US$864 million was externalised in 2015 by individuals under the auspices of free funds for various dubious and unwarranted purposes that included remittance of donations to oneself, offshore investments and externalisation of export sales proceeds by corporates through individual accounts leading to pervasive tax evasion and externalisation.
The central bank governor revealed that US$1,2 billion was externalised by companies in the form of export proceeds, high management and expert fees.
“We are exporting liquidity. We need to put a stop to this behaviour. There is need for a fundamental shift to protect the integrity of the multi-currency system,” he warned.
There is no quick-fix solution to the country’s liquidity crisis, according to economist John Robertson, echoing Cross’ statements.
“I wish I could suggest a short-term solution, but there is no way to fix this quickly,” Robertson said. “We need to borrow money but there is no one to give it to us because we are considered a huge risk. We have got to rebuild and that can only be done by our ability to pay back debts and the ability to pay back debts comes from being productive.”
Robertson said the rebuilding of the country’s economy has to start with the agricultural sector, which was decimated by a chaotic land reform programme in 2000.
“It will take a long time to rebuild because if you have spent 15 years wrecking the economy you can then not fix it in three years,” Robertson said. “The process of rebuilding industry was done over many decades.”
He said the issue of widespread corruption compounded the liquidity crisis.
Economist and Buy Zimbabwe chairman Oswell Binha said the liquidity crunch is a strong indication of the lack of confidence in the economy.
“The challenge is that when there is a problem, we respond to symptoms of the problem without addressing the problem itself,” Binha noted. “The liquidity crisis is a fundamental indication of a deep-rooted lack of confidence in the economy. It is a key attribute of a non-functioning economy.”
Binha said the liquidity crunch will persist as long as government continues to politicise the economy.
“You cannot have political issues on an economic template. It just does not work,” Binha said.
He said the liquidity crisis will continue as long as a “deep-rooted underground economy” run by those in influential positions which externalised money from the country, continues to exist.