US$200m facility already wiped out

Source: US$200m facility already wiped out – The Zimbabwe Independent June 17, 2016

DESPERATE measures by the Reserve Bank of Zimbabwe to inject bond notes backed by a US$200 million African Export and Import Bank facility to ease the current liquidity constraints is proving to be an ill-advised decision as the cash situation has subsequently worsened.

By Taurai Mangudhla

Based on discussions with business executives in various sectors of the economy since May 4 2016 when RBZ governor John Mangudya made his monetary policy interventions, observers say that far more than US$200 million has been lost from the formal banking channels, meaning that the measures were self-defeating.

Mangudya’s response to the cash shortages which resulted from, among other macro-economic problems, tight liquidity and externalisation of the US dollar have exacerbated the economic situation, analysts say.

Other than introducing bond notes, Mandudya introduced stringent measures such as capping cash withdrawals for corporates to US$10 000 and individuals to US$1 000, restricting offshore investment and suspending free funds in an effort to tackle illicit money flows.

Banks have, however, been failing to meet the withdrawal limits with most offering clients a maximum of US$100 per day, while corporates are being limited to as little as US$1 000 as the cash shortages worsen.

The introduction of bond notes was viewed with scepticism amid growing fears the central bank could be trying to smuggle back the now defunct Zimbabwean dollar into circulation, sparking a wave of panic withdrawals that have according to reports seen bank deposits plunge by 40% in the past two months.

Clearly, Mangudya’s actions had unanticipated or unintended effects.

Prior to government’s announcement of the bond note introduction, reports indicated there were around 100 Chinese companies, a number of fuel traders and Indian traders that were operating without bank accounts, while some supermarkets which have foreign parentage were externalising cash.

After Mandudya’s announcement there was a rush by ordinary people and corporates to withdraw their money from banks, while those with cash chose not to bank the bulk of their money.

Information at hand suggests individuals with large balances in their accounts have been transferring money into their corporate accounts where they can withdraw larger amounts.

The money, one source said, has either been shipped out or remains in the country, but outside the banking system.

Economist Vince Musewe said government’s late response to the situation amounts to “closing the stable door when the horse has already bolted out,” adding contrary to authorities’ broader intent to improve the ease of doing business, the country risk perception had worsened since Mangudya’s controversial monetary policy measures.

“The country’s risk perception has increased and this will create further resistance by anyone with capital unless there are substantive political changes and fundamental economic reforms,” said Musewe.

Musewe said introduction of bond notes and exchange control measures capping imports will worsen the lack of confidence in Zimbabwe.

“We are now in an emergency situation and policy interventions will not be trusted given our history as a country with an inability to follow through with our stated policies. Short of Mugabe stepping down and his replacement by a new leadership team the situation is most likely to deteriorate further,” he said.

“Nobody trusts this regime anymore, especially with their money. We are now policing businesses to bank their cash and then limiting what they can take out. That is effectively confiscating money from citizens,” added Musewe.

Economist John Robertson said government’s late response to problems that date as far back as 2000 during the fast-track land reform programme is accelerating economic haemorrhage.

“This did not just happen in May; it was happening over a period of time. First of all, destroying productive agriculture meant we had to import food. The cost of production has been rising making it cheaper to import which means a huge current account deficit,” said Robertson.

“Indigenisation has caused capital flight. Prior to Mangudya’s announcement, more capital left the country because of indigenisation and people felt there is no need to keep money here with companies facing forced closures. The indigenisation policy accelerated outflow of money. It’s really an accumulation of many things over a lengthy period of time and all of these are facets of this multi-layered crisis.

“The effects of Mangudya’s measures are being felt now. The Chinese are taking US dollars to China because they can buy more there. The Chinese also realise this is not the best time to keep money here. It’s better to move it. So it is not just one factor and it didn’t just start in May.”

Economist and former Economic Planning minister Tapiwa Mashakada said lack of confidence and panic triggered by the bond note announcement fears have spurred capital flight and externalisation.

“All this has happened under the nose of government whose financial literacy is questionable. Deposits have dropped by 40% so far as depositors take away their money. The cash crisis is continuing unabated. Authorities have no long-term solution except to try re-introduce the Zimdollar. Government is in a monetary and fiscal cul-de-sac,” said Mashakada in an interview.

In a paper titled Alternative Solutions to the Current Cash Crisis, Mashakada said the banking public is worsening an already bad situation by making panic withdrawals.

He said banks are receiving very negligible daily deposits, while a parallel market for cash in return for RTGS at premiums of between 10% and 25% has emerged.

Giving alternative solutions, Mashakada said a permanent resolution to the general liquidity and cash crisis in the economy could be found by addressing confidence issues through a process that requires national convergence around a political and economic reform agenda for Zimbabwe as well as restoring international relations in order to get official development assistance and resolving the debt trap.

“The solution is therefore to open up the economy and increase the injection of more capital into the economy. This is where the policy matrices of Zimbabwe have to change in order to attract FDI and fresh capital,” said Mashakada.

“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.”