Alternative solutions to the liquidity, cash crisis

Source: Alternative solutions to the liquidity, cash crisis – The Zimbabwe Independent June 17, 2016

The second quarter of 2016 goes down in the records of history as a period that saw the shaking of the banking sector to an extent reminiscent of 2008. Banks started running out of cash and withdrawal limits were introduced. The current situation is as follows:

Tapiwa Mashakada

The cash crisis in fact started around December 2015 when we could see tale tale signs. Back then queues were forming outside some banks while other banks placed moderate limits. We all thought this was a once-off thing. Little did we realise that it was in fact a tip of the iceberg. It is therefore important to examine the real causes of the mutation of the liquidity crisis to a cash crisis. But before doing that, let me define the difference between the two. A liquidity crisis is governed by lending terms and conditions which are normally punitive. For the private sector, firms could not borrow cheaply because of the country risk factor. Instead of accessing cheap off shore funds at 4% interest, they are borrowing short-term for rates as high as 20% per annum.

With a cash crisis, the quantity of broad money supply (M3), is short in circulation. In the case of cash shortages, there are more leakages than injections into the banking system. It is estimated that because of leakages, the amount of deposits in Zimbabwe’s banking sector could have dropped from US$5billion dollars as at December 2015 to US$2 billion dollars at present.

Structural problems leading to the cash crisis/liquidity crisis

In my view, there are reasons that explain the cash shortages.

Policy inconsistency

I have argued and I still argue for the umpieth time that the lack of clarity on the implementation of the Indigenisation law and policy has caused severe damage on the economy. In December, 2015 government ministers openly contradicted each other on the indigenisation framework. The Indigenisation minister Patrick Zhuwao advocated for a carte blanche approach which entailed the seizure, closure and cancellation of business licenses of all foreign firms that had not complied with the 51% rquirement. Banks were not spared from this threat. Zhuwao’s counterpart, Minister of Finance Patrick Chinamasa preferred a more articulated sector by sector, case by case approach which excluded banks and requiring them to earn credits for investing locally and empowering locals.

In January 2016, the Zhuwao, unilaterally announced his new Indigenisation frameworks and again threatened foreign firms and banks to comply with the 51% indigenisation threshold or face closure. This caused panic and companies withdrew their funds from banks and started externalising. Domestic companies followed suit. For example, one supermarket chain, which used to bank US$400 000 per week, reduced its bank deposits to US$100 000. This is just one example among many.

It took the intervention of the President’s Office to issue a circular clarifying the Indigenisation frameworks but it was too late — a case of closing the stables when the horses had bolted out. The President’s Office clarified that the 51% should only apply to resource-based sectors. For other sectors, companies should be given longer and flexible periods to comply. Some foreign companies could be charged empowerment levies and/or credit in lieu of the 51% threshold.

The Lima debt service agreement

Zimbabwe’s validated total debt is about US$10 billion dollars. At the IMF/World Bank meetings in Lima, Peru in August 2015, Chinamasa gave a written commitment to multi-lateral lenders that Zimbabwe would cooperate and clear its US$1,8 billion dollar arears by end of April 2016. These arrears are in regard to the AfDB (US$600 million), IMF (US$150 million) and World Bank (US$1,2 billion). It was hoped that the clearance of arrears would unlock new loans. This matter was not brought to Parliament. The IMF debt was to be cleared by SDRs that were sitting at the Reserve Bank. The AfDB offered to provide a loan to the Zimbabwean government to clear the US$600 million. Government would then mobilise domestic financial resources to clear the balance of US$1,2 billion dollars owed to the World Bank. I suspect that, if at all it was paid, government had to mop up money from the treasury and the domestic money market to service debt arrears and meet the April 2016 deadline. Initially, it was thought that Algeria would come to the rescue party.

Lack of fiscal space

Government budget revenues reached a plateau in 2013 and thereafter got stuck at below US$4 billion. Revenue collections have been declining. Government’s monthly salary bill for the 550 000 strong civil service is about US$120 million out of monthly revenue collections of about US$230 million.

The government has been running a monthly budget deficit of at least US$120 million dollars since the beginning of the year. Not all diamond revenues have been coming to treasury.

ZIMRA’s tax debt rose from US$1,97 billion dollars at the end of 2015 to US$2,58 billion at the end of the first quarter of 2016. This represents a 30,9% increase. The culprits are government (0,18)%, municipalities , parastatals and public utilities (26,77)% and private entities (73,05)%.

Illicit financial flows, porous border posts and corruption.

Trade deficit

Zimbabwe’s balance of payments position is worsening. Zimbabwe imports 60% of its import requirements from South Africa and exports 40% to South Africa. The trade balance is heavily tilted in favour of South Africa. There are basically 3 reasons for this.

(a) Apart from fuel imports which are unavoidable, Zimbabwe imports almost everything from South Africa including lemons, tomatoes, potatoes and onions which are grown locally. This is wasting foreign currency.

(b) The Zimbabwean manufacturing sector’s capacity utilisation is on average below 40%. The sector’s exports are affected by lack of beneficiation and value addition, high production costs, liquidity challenges, competition among other factors. This is the reason why Zimbabwe cannot bridge the historical trade gap averaging (US$2,9 billion dollars per annum) with South Africa.

(c) The weakening South African rand makes imports cheaper. Moreover dollarisation has meant that Zimbabwe is the “fishing pond” for United States dollars in the region and beyond.

Nostro accounts

In order to meet the requirements of depositors, banks may recall funds from their off-shore accounts (nostro accounts). These funds are normally reserved for foreign payments. For sometime now, banks have been bridging their balance sheets from nostro accounts and most nostro accounts have been depleted. Banks can no longer resort to that facility.

Sluggish growth

For the last three and half years, the economy has registered an average growth rate of between 2% and 3% which is below the annual average continental growth rate of 4,5%. In fact the economy has been a state of deflation for a prolonged period without any stimulus measures. About 300 companies are closing every month while those that remain in operation are struggling to remain viable. This effectively means that the national cake is getting smaller and smaller. About 80% of Zimbabwe’s economy is now informal. This is a structural problem which is negatively affecting the national budget. Low production has a boomerang effect on growth, employment and exports.

Low national savings

At 8% of GDP, national savings are too low to create a sufficient base for financial intermediation. The international benchmark is a savings to GDP ratio of 40%. Despite moral suasion from the central bank, domestic banks have been reluctant to stop financial arbitrage. Deposits rates are still much lower than lending rates. This has promoted financial exclusion rather than inclusion.

The non-usage of plastic money

This, in my view, is a very superficial reason for cash shortages but admittedly it creates a run on deposits as customers withdraw cash for all their daily business transactions.

Liberalisation of the capital account

Since dollarisation in 2009, the capital account has been highly liberalised with virtually generous limits to cash withdrawals. An individual could withdraw as much as Us$10 000 a day while companies could withdraw as much as US$30 000-$40 000 per day without any problems. In addition, individuals could travel out of the country with as much as US$10 000 dollars in the pocket. Foreign companies could repatriate 100% of their after-tax profits and dividends. If done systematically, this can put a strain on the liquidity position of banks.

RBZ’s response

In response to the cash crisis, the RBZ has, inter alia, instituted the following measures:

Introduction of maximum daily/weekly withdrawal limits.

Restrictions on external payments/RTGs through priority foreign payment list.

Raids on companies and individuals.

Plans to introduce bond notes by October 2016, in the following denominations (US$5, US$10, US$15 and US$20). These bank notes are backed by a US$200 million Afrexim Bank facility.

Introduction of a 5% export incentive payable in bond notes on exports receipts.

Daily imports of United States Dollars (cash) in the amount of between US$10 million to US$15 million dollars.

Public response

The banking public is worsening an already bad situation by making panic withdrawals. There is a legitimate fear of the gradual return of the Zimbabwean dollar in view of the sustainability of dollarisation in the context of weak regional currencies.

The banking public has got trust issues with both the RBZ and government.

Memories of 2008 and the hyperinflationary Zim- dollar period are still fresh in the minds of the people.

Banks are receiving very negligible daily deposits (very insignificant)

The emergence of a parallel market for cash in return for RTGS. The premium is between 10%-25%.
It is feared that the so-called US$200 million Afrexim Bank facility is only but a loan application, which is not yet there. It is therefore a pie in the sky.

Alternative solutions

I cannot finish my analysis without proffering alternative solutions or recommendations as I hereby do. In my view, a permanent solution to the general liquidity and cash crisis in the economy should be sought by implementing the following urgent but comprehensive measures:

(1) Addressing the structural problems I have outlined above.

(2) Addressing confidence issues — this process requires national convergence around a political and economic reform agenda for Zimbabwe.

(3) Restoring international relations in order to get official development assistance (ODA)-bilateral.

(4) Resolving the debt trap through the HIPC system in order to get multi-lateral balance of payments support.

(5) Increasing the supply of the United States Dollar. This can be achieved by looking at all the sources of foreign currency. The solution is therefore to open up the economy and increase the injection or supply of more United States dollars into the Zimbabwean economy. This is where the policy matrices of Zimbabwe have to change in order to attract FDI and fresh capital. Without any prevarication or ambiguity, the Indigenisation policy must be the very first one to go. It is one of the huge elephants in the living room. As a matter of emphasis, the main obstacle is the toxic confidence crisis which requires a political solution. Inclusivity and national dialogue, more than farcical elections, can resolve the confidence crisis.

(6) Switch over to the rand monetary area.

De-dollarisation is now inevitable. It is crystal clear that, in the absence of reforms, an overvalued United States Dollar is unsustainable amid weak regional currencies. In the circumstances, it only makes sense to use the South African rand as the anchor currency. The rand would provide the typical functions of money, which is to store value and at the same time becoming a convenient medium of circulation. The Reserve Bank of South Africa has to be engaged so as to allay their genuine fears of the contagion from Zimbabwe’s misaligned macro-economic framework. As we all know, entrance into any monetary area requires strict macro-economic convergence. There is no such thing as a basket of currencies because the market will opt for the strongest currency.

(7) The controls that have been put in place by the RBZ should be time-bound. The market should be allowed to eventually operate with minimum intervention. Controls give investors a siege mentality which is inimical to confidence building. The RBZ should give assurances to this effect as soon as possible.

(8) Bond notes are but a precursor and a chameleonic way of re-introducing the Zim dollar. All they do is promote the parallel market again. There is a clear affirnity and nolstagia on the part of government to return to the Zim dollar. Unfortunately, all the fundamentals are not yet right for doing that. The following preconditions are required. These are (a) the restoration of local production and growth (b) the rebuilding of foreign exchange reserves (c) politically induced confidence (d) addressing the domestic debt, international debt and the trade deficit and (e) macro-economic stability.

Mashakada is former minister of Economic Planning & Investment Promotion – MP Hatfield. These New perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com, cell +263 772 382 852.