ZIMBABWE’S cash crisis, which began two years ago, is set to persist due to excessive government borrowing. This comes amid growing concerns the central bank’s interventionist measures could crowd out private sector lending and stoke inflation at a time exports have been gradually growing, a World Bank report has shown.
The country’s unsustainable trade or current account deficit, poor balance-of-payments position, as well as massive revenue leakages and an uneven distribution of liquidity in the market are the major reasons behind the prevailing serious cash shortages buffeting the economy.
The situation is also exacerbated by depleted nostro accounts balances which have been drained by the ballooning import bill.
According to a World Bank economic update on Zimbabwe this week, the economy faces complex fiscal and macroeconomic challenges, a conclusion that waters down government’s ambitious economic growth rates.
The World Bank sees the economy registering 2,8% growth in 2017, while government projects 3,7% growth buoyed by mining and agricultural recovery.
“Given Zimbabwe’s ongoing fiscal challenges, liquidity shortages are expected to continue for the foreseeable future, and exports are projected to grow modestly,” the World Bank report on Zimbabwe reads.
“The public debt stock increased from US$9,4 billion (or 58% of GDP) in December 2015 to US$11,4 billion (or 70% of GDP) in 2016. In addition to the fiscal deficit, purchase of NPLs (non-performing loans) through the Zimbabwe Asset Management Company and the assumption of pre-2008 arrears in the fiscal accounts contributed to the increase in the debt stock. Domestic debt rose to US$2,3 billion to US$3,9 billion. Eighty percent of Zimbabwe’s domestic debt is held by commercial banks. Most public debt is short-term weakening the debt profile.”
Commenting on bond notes, the report said administrative measures may be circumvented by a parallel market.
Official figures show that in 2016, the government borrowed the equivalent of roughly 11% of GDP to finance the fiscal deficit and to pay for other commitments such as arrears.
It raised the majority of this financing by an overdraft with the Reserve Bank Zimbabwe (RBZ) and by issuing Treasury Bills to the private sector.
Most of the Treasury Bills were eventually bought by commercial banks at discounted rates. While this boosted the profitability of banks in the short term, the scale of the borrowing resulted in liquidity shortages across the financial sector.
In response, banks placed daily cash withdrawal limits, while the apex bank issued bond notes last November and promoted the use of mobile payments.
RBZ announced other stringent measures, which included restrictions on offshore investment and suspending fee funds to tackle illicit money flows and capital flight remittances after nearly US$2 billion eveporated from the capital-starved economy through externalisation last year.
“Domestic financial markets are too small to absorb the government of Zimbabwe US$1 billion overdraft with the RBZ.
Replacing this overdraft with treasury bills and a domestic bond would further constrain the supply of credit to the private sector,” the report says.