Following my article on the bond notes in last week’s edition of the Zimbabwe Independent, I have received questions as to why the cash crisis is prevailing and what could have caused it. In economics, there is almost never one answer, but rather possibilities or permutations. To solve a problem, we must identify it first.
An injection expands the money supply while a leakage contracts it. What we can be sure of is that the cash crisis has been caused by a leakage from the system. In the past, foreign currency dried up as ex-Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono, during his time in Level 22, allegedly raided corporate accounts of their foreign currency account (FCA) balances ostensibly to fund matters at the core of national interest.
In his monetary policy statement presented in January 2016, the current RBZ chief John Mangudya stated that 80,7% of transactions by value are conducted via real-time gross settlement (RTGS) system followed by 7,5% by mobile, 6,19% automated teller machines (ATMs), 2,84% point-of-sale (POS), internet 2,52% with cheque transactions accounting for 0,26%. There was no mention of cash transactions. In terms of volumes, mobile accounted for 87,87%, POS 5,64%, ATMs 5,23%, RTGS 0,88%, internet 0,22% while cheques accounted for 0,15%. Perhaps cash was excluded on the grounds of materiality. Even so, it does appear from the picture that cash transactions are not as significant as we are made to believe.
According to the central bank, between 2009 and 2015, the current account deficit was widest in 2013 when it registered -US$3,431 billion. We did not have a system-wide cash crunch at the time despite this. Even in 2011 when the current account deficit was –US$3,386 billion. This entails that something must have happened in 2016 to cause a cash crunch, especially bearing in mind that we have just entered the last month of the second quarter of the year.
It cannot be the spill-over effects of 2015 because in that year, the deficit at –US$2,839 billion (projection) would be third lowest of the seven-year period. The overall balance of payments position was at its worst in 2011 when it recorded –US$783 million. With this information, I reject the hypothesis that the widening current account deficit is the root cause. In fact, in 2015 it would have narrowed by circa US$200 million.
Perhaps the explanation may lie in the statistics relating to banked export receipts. After reaching a peak of US$4,535 billion in 2013, being the last season of the inclusive government, banked export receipts declined from 2014 by US$857 million and by a further US$784 million in 2015. There is no doubt that the expiry of the inclusive government shifted the economic paradigm. In the period after 2013, this is where we saw a deeper pronunciation of the indigenisation policy. The decline in banked export receipts that was witnessed in 2014 and 2015 has an important cumulative effect to swallow the liquidity in the market. However, it is not reasonable to cause a crunch in 2016 and not cause any in the respective years of decline.
The cash crisis was deepened by the announcement by the RBZ that they would be introducing bond notes. While the central bank said that the bond notes would be backed by a US$200-million Afrexim Bank facility, the market doubted this and envisaged the return of the abandoned local currency. Consequently, there was a run on banks precipitated by none other than the regulator itself. This is unusual. The miscalculation by the central bank resulted in panic withdrawals. So all of a sudden, everyone wants their money and this, inevitably, exacerbates the cash crisis. Before the announcement, the situation could have been more manageable. As if that was not enough, Mangudya was angry as to why the market did not understand his proposal when he was speaking before parliament. This made the situation worse. In finance, anger by a regulator easily drives away capital.
To put things into perspective, let me explain the rudiments of banking. Banks make money by creating more money from deposits through credit creation. The rudiments come from the operations of the goldsmiths who kept gold safely in their custody on behalf of their customers. They charged a fee for safekeeping; this is what is famously known as ledger fees or service fees. As they discovered that very few people came to withdraw their gold, but rather used gold receipts for commerce, the goldsmith started lending the gold for a fee to those who desired to borrow it. This fee now encompasses the arrangement fee, or establishment fee plus an interest rate. In the end those who needed to borrow gold, upon realising that the gold receipts were as acceptable as gold (as good as gold), they started borrowing the receipts from the goldsmiths. After all they were as good as gold.
To illustrate this, with an initial 100 ounces of gold a goldsmith who decided to lend 50 ounces would have created total money supply of 150 ounces of gold. In the event of goldsmith run or in today’s parlance a bank run if all of the receipts holders went to withdraw their gold, the goldsmith would fail to pay back the gold; he only has 100 ounces of gold yet he has issued 150 ounces worth of gold. The goldsmith promised to pay the bearer on demand. The matter at hand is that both the borrowers and the depositors have a claim on the deposits in their account. This in part explains the pressure banks are facing regarding cash withdrawals.
Of course, banks do put in place clauses that restrict borrowers’ access to funds, but all the same abruptly stopping a good customer from accessing their credit facilities which they were enjoying dampens confidence.
In addition, it has been reported that there has been a leakage of US$2 billion from the system due to externalisation. If this is true, then it means that money has gone out of circulation. For a country with deposits of less than US$6 billion, this translates to 33%, which is significant. The situation gets worse when we compare with the country’s broad money supply of less than US$5 billion. It translates to 40%.
In his January monetary policy statement, Mangudya puts the amount externalised at US$1,9 billion between January and December 2015. Of this amount, he said US$684 million was for purposes of investments, donations and account transfers. This amount is sadly uncomfortably too close to the US$1,1 billion the country received as foreign investments between 2009 and 2015. If a foreign investor, who is unhappy with the country’s policies or returns, decides to take back his money to another destination, this cannot be externalisation. We appropriately call it capital flight.
Externalisation is a narrow crime whose definition may not be easy to apply in reality in the context of a country using a multi-currency system with relaxed exchange control regulations. The payment of service fees, technical fees, management fees and service payments does not outright constitute externalisation though it can be a way of externalising. In any event, it is a crime to externalise funds.
For the central bank to say US$2 billion or US$684 million was externalised, it means they must know the culprits.
Why then is action not being taken against the culprits? Or why is the public not being informed of discussions with the culprits to bring back the money? Why has it taken a shortage of cash to start acting on externalisation?
To plug externalisation, one does not need to introduce bond notes; they just need a robust exchange control framework. In addition, authorities must deal with the culprits decisively and appropriately or negotiate for the return of funds or assets. The lack of action suggests that the claims of externalisation cannot be substantiated.
Until Gono left office, he was always threatening to name and shame those externalising money.
Having said all, the architecture of the Aftrades (Afrexim Bank Trade Debt-backed Securities) needs to be looked at. By close of last year, US$178 million had been advanced for two years. Given the spirit of this lender-of-last-resort facility, the tenor is too long. It means now the coffers are empty. If they were not, the RBZ would have jumped on board to rescue the situation.
In addition, what has deepened the cash crisis is the weak responsiveness of the central bank. By definition, a bank must have money. When customers go to banks and they cannot find their money, this dampens confidence and drives away capital and dissuades foreign direct investment.
This apparent quagmire that we find ourselves in is a bigger threat than the indigenisation laws which can be negotiated. While the date of introduction of the bond notes has been postponed further, the panic withdrawals and therefore the shortages will not go away until the matter is put to finality. Right now depositors are scrambling to withdraw before October. An announcement by the RBZ governor or the Treasury chief that the bond notes will not be introduced will be a big game changer. Of course, something is amiss here. Why are banks not importing cash if their nostro accounts are funded?
Is it fear of externalisation or what?
Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications — email@example.com, +267 73 113 161