Liquidity crunch to persist

via Liquidity crunch to persist | The Financial Gazette  by Maggie Mzumara 31 Oct 2013

THE liquidity crisis, characterised by shortages of cash due to lack of access to and cost of finance, is likely to persist till the festive season, analysts told the Financial Gazette this week.

Following the country’s adoption of the hard currency regime in 2009, Zimbabwe lost the ability to control its monetary supply.

As such, for liquidity the country has been relying to a large extent on export earnings and also Diaspora remittances and Foreign Direct Investment (FDI), among others.

With the country’s export payments far outweighed by the import bill, the country has mostly been operating on a negative foreign currency net position.

According to latest statistics, from the period beginning January 1 to September 30, 2013 the country had US$5,2 billion in foreign currency receipts, compared to foreign currency payments of US$6,5 billion for the same period. This created a negative foreign currency net position of US$1,3 billion.

Economist, Godfrey Kanyenze, said this position is likely to worsen as the downward trend in commodity prices persists.

“Commodity prices continue to weaken; add this to other factors like the Zimbabwe Revenue Authority’s failure to meets its quarter targets among others and this points to a generally decelerating performance,” Kanyenze said, adding that this has been “quite a precarious year,” for the country.

The reduced demand for Zimbabwean commodities such as platinum, diamonds, chrome, gold, tobacco etc this year from countries such as China, India and Brazil has left the country in a precarious situation.

Following shunning by its traditional partners in Europe (the West), China, India and Brazil among a few others has emerged as major trading partners for Zimbabwe, but reduced demand from these new partners has badly affected the export earnings for the country.

With Diaspora remittances also generally low in these past few years following the liquidity crunch experienced in most of the Diaspora; and FDI constricted by the indigenisation programme, which capital holders do not find enticing, the opportunities of improving the liquidity position of the country are dire.

As such, heightened de-industrialisation persists due to lack of access to and cost of the limited finance available.

“It means there will continue to be less money for any financial undertakings,” Kanyenze said.

Apparently, dollarisation which seemed to be the solution when it was introduced back at the beginning of the inclusive government has turned out to be an albatross in the neck of the country.

While it stabilised runaway inflation which had wreaked havoc on the country’s economy in the years leading up to 2008, leaving store shelves bare and the population scrambling east, west, north and particularly south for basic foodstuff solutions, dollarisation came with its own set of challenges.

“When we dollarised, in excess of 65 percent of the population was unbanked,” economist Nyasha Muchichwa told the Financial Gazette.

“People stopped using banks because they no longer trusted them. To this day banks have just become conduits of money not a place where people deposit savings. Add this to shrunken remittances from the Diaspora and we find ourselves with very limited liquidity.”

Muchichwa said another factor which has exacerbated the liquidity situation was the fact that aid, which in the past had brought in considerable amount of foreign currency into the country, has of late stopped being a source of the same due to the fact that aid is now mostly humanitarian and not actual finance.

“So no money is being channelled into the system in any significant amounts from any direction,” Muchichwa said, adding that it is limited amount of cash in the system which makes it expensive to borrow as interest rates have become very high.

Without resources to put into manufacturing companies, capacity utilisation will continue to decline, more businesses could close down resulting in many more people losing jobs.

“As it is many people are going without salaries as companies including some parastatals are not able to pay them,” Muchichwa said.

With such a bleak situation, merry-making at Christmas may not be so merry.