The liquidity crunch revisted

via The liquidity crunch revisted | The Financial Gazette by Farai Mutambanengwe 14 Nov 2013

The latest statistics, as well as general market experiences are currently pointing to an economy that is being drained of the last drops of liquidity. While the “uncertainty” issues have been dealt with and everyone is clear about the political direction for at least the next five years, there remain the fundamental issues that are now coming to the fore. The most important of these is the fact that we import far more than we produce or export.

This column first predicted the current crunch as far back as two years ago, based on the balance of payments position and banks’ tendencies then, which were to lend to salaries and importers, while shunning local producers. What was perhaps missed in the prediction was the “rope” in the form of external and domestic credit which the economy had to first exhaust before it would really come to a halt.

This was even before the capacity utilisation figures began to fall, or gross domestic product (GDP) “growth rates” began to decelerate. It was not the product of prophecy, but of simply extrapolating the macro-economic numbers. The evidence was there for anyone who wanted to see it that we were headed for a melt-down.

Our independent media is having a field day shouting out that government is “clueless”, and of course the opposition has made maximum mileage of the situation. While bad governance has something to do with it, it is not a product of the election result, but actually of what transpired during the government of national unity (GNU) period. The opposition therefore cannot exonerate themselves from what is currently taking place.

Yes, if the opposition had won the election we would probably be swimming in liquidity right now, but it would have been at the cost of the new-found entrepreneurial spirit that the indigenisation drive has spawned. Most of our local businesses would have been pushed out of the way, and we would all have been forced back to being workers, rather than business owners and entrepreneurs. In short, we would have been giving up the birthright for a bowl of soup.

To put things in focus, the liquidity crunch is the net result of very myopic short-term actions taken by our economic players under the guise of being in “survival mode”. A couple of weeks ago we discussed the issue of locals preferring imports over locally products, and how that was resulting in the decline in capacity utilisation. Getting from there to the balance of payments position simply requires that one add on the action of banks and the financial sector, and government.

Since dollarisation, banks have taken the lazy route of funding what they perceived as the lowest risk activity in the economy, as well as lending for the shortest term possible. The standard excuse was that they were dealing with demand deposits, and therefore they could not structure long term loans. The real reason was that they were trying to make the most money in the shortest possible period of time.
In particular, banks generally refused to fund the manufacturing and productive sectors, and flatly refused to fund primary agriculture, preferring the retail and consumer sectors instead. Thus imports flourished not only because of the actions of our major retail chains and unpatriotic buying habits, but also because that is where money was being poured into by the financial sector.

The claim that banks cannot structure long-term loans is baseless as that is exactly what they are doing when setting up car purchase schemes for civil servants. They have fallen over themselves extending huge sums to large corporations that now constitute the bulk of the non-performing loans and yet dismiss out of hand small to medium enterprises’ funding requests which are individually small, but whose impact on the economy would actually be huge.

Had the banks been primarily funding production in the last five years, not only would our balance of payments position be much better than what it is now, but they would have been pleasantly surprised as most of those loans would have started getting repaid ahead of time as the economy improved. Instead, they went for what they thought were short term loans, but which have instead become non-performing ones.
The second factor mentioned above was government, and as indicated their negative actions were present throughout the GNU. The first thing that happened upon everyone assuming office was of course that they bought themselves good cars. There is not one Minister or Member of Parliament, Zanu-PF or MDC, that refused those vehicles. I may be mistaken, but I do not believe that any one of those vehicles was bought from our local assemblers.

One cannot lose sight of the fact that we had a bloated government, for political expediency purposes. Instead of adopting true austerity as a way of sending the right signals to the rest of the economy, the Government went on to spend as though it was business as usual. “Strategy retreats” at the much loved Elephant Hills hotel were (and still are) a commonplace occurrence, and treasury’s focus was on revenue collection, rather than enhancing the revenue base.

Most important, though is the issue of corruption.  Corruption has rightly been called a cancer and we have had it for so long it now is just seen as a normal feature of our economic landscape. From “little” things like the cops and kombis drama we have on our roads, to senior police officers with outrageously expensive assets that can never be related to their salaries. From tenders being awarded in flagrant violation of the rules to national institutions engaging in activities that have no relation whatsoever to their founding mandate so that someone can pocket something.

One study I recently read stated that corruption could have taken as much as 20 percent of our GDP in 2011. The reality is far worse because you cannot measure what could have been that did not happen because of it. Its opportunity cost far exceeds any visible impacts one may measure. Rwanda is a current example of how fast an economy can turn around when corruption is eliminated, and by indirect measure, just how badly the scourge can impact an affected country.When corruption has become a mindset as in the Zimbabwe scenario, it becomes as difficult as colonialism to get rid of. Our President has rightly pointed out that the colonial mindset overhang goes much further than the attainment of political independence, and I would say the same goes for corruption. In fact, it is as difficult to eradicate as a malignant cancer, which is what it has become in Zimbabwe. Token slaps on the wrist will not change much, if anything, and this is perhaps the reason that at one time people felt a change of government could address it. The GNU experience sadly demonstrated that the proffered alternative was just as infected, if not more virulently so, given their short reign yet massive exploits within that period.

If the current government is serious about wanting to reverse the country’s economic fortunes, this is an area in which hard decisions will have to be made.
Unfortunately, even if the private sector were to start to behave but government does not curb corruption, the much-needed turnaround is unlikely to occur. It is common knowledge that government is supposed to create an enabling environment, while the private sector focuses on production. A poisoned womb can never give birth to a healthy child.

Farai Mutambanengwe is the founder and executive officer of the SME Association of Zimbabwe. For details on the Association, visit www.smeaz.org.zw or e-mailenquiries@smeaz.org.zw. You can discuss this and other issues on the “SME Association of Zimbabwe” group page on LinkedIn.