Zimbabwe requires US$900 million to curb liquidity crisis

Source: Zimbabwe requires US$900 million to curb liquidity crisis | The Financial Gazette January 31, 2017

ZIMBABWE requires in excess of US$900 million in cash to curb the liquidity crisis but the amount will be impossible to inject if the US dollar remains the mother currency.
In his presentation on liquidity crisis at an economic outlook symposium hosted by the Confederation of Zimbabwe Industries on Thursday, University of Zimbabwe economics lecturer Ashok Chakravat said bond notes can ease the liquidity situation so long as there is an adequate supply of US dollars. They are, however, an inadequate measure to solve the liquidity problem.
“A cash to deposit ratio of around 15 percent is necessary to prevent liquidity problems in an economy. Currently, we have US$6,2 billion in deposits. So we need about US$900 million as cash in circulation and in the nostros,” he said.
Currently the banking system has US$232 million in US dollar translating to a shortfall of almost US$650-700 million. As at November 2016, nostro accounts balances were at US$163,4 million.
“If the ratio of bond notes to US dollar is increased beyond current proportions, then it will no longer be a multi-currency situation and premiums will start emerging on US dollar versus bond notes. As the cash shortage deepens, this premium will rise and can be viewed as representing the depreciation rate of the new currency in the form of RTGS balances. The value of all deposits will decline in terms of real US dollar,” he said.
Chakravat advocated for the informal adoption of the rand.
“While RBZ recently indicated that Zimbabwe was in no position to join the South African Customs Union, as per requirements the immediate solution is informal adoption as in 2009.”
Another UZ lecturer, Tony Hawkins also supported the adoption of the rand only if it is accompanied by devaluation. He added that though the rand has downsides, being a volatile currency, it was relevant particularly in the Zimbabwe set up.
Both economists agreed that it would benefit the economy more if local manufacturers of finished goods were incentivised more to boost exports and resultantly earn foreign currency and help reduce the trade deficit.
“Miners and (tobacco) farmers already have no choice, but to export their produce,” Hawkins said.
Local tobacco farmers produce more than local cigarette manufacturers can absorb, meaning that the export market has become the main destination for their produce while minerals, exported mainly in raw form, are processed outside Zimbabwe.
Hawkins said mineral and tobacco prices were determined by international markets, which puts the country at a disadvantage.
This was, however, not the case with other manufactured goods that could be sold at a premium and place local manufacturers at an advantage to earn more.
Chakravati said manufacturers must be getting an incentive of up to 15 percent as this will encourage them to do all that within their means to up production and improve the quality of goods for the export market.
“The incentive must be for manufactured exports,” he said.
The economists said “internal devaluation” through reduction of overheads such as wages, utility costs as well as other amenities was critical in ensuring competitiveness of Zimbabwean products.
They also said it was critical for government to guard against complacency by industries protected under Statutory Instrument 64 of 2016 and ensure they modernised their operations before import restrictions are eventually removed.
Meanwhile, Hawkins said government must strive to create a conducive environment for all sectors of the economy to prosper and refrain from prioritising a particular sector.
“Government cannot pick winners. They cannot determine which industry is going to be successful in the long run. Government must set a broad framework of appropriate policies and leave those in business to do their business,” he said. FinX