Home » Business » Factors Entrenching Liquidity Crunch [opinion]

One of the economic ills that continues to prevail in Zimbabwe is illiquidity in the money market.

Banks and other financial institutions have insufficient resources to provide funding critically needed by commerce and industry, agriculture, tourism, mining and other economic sectors.

Ever since the free-fall of the Zimbabwean dollar, from 1997 to 2009, the money market has been largely under-funded.

Concurrently, enterprises in the country became under-capitalised, their capital resources were eroded by hyperinflation characteristic of the economy in 2007 and 2008.

Not only did businesses fail to finance their operations, but the majority of the population got poorer and could barely meet their basic needs. This aersely impacted on all businesses, especially those which did not deal in basic commodities.

In order to arrest hyperinflation, the demonetisation of the Zimbabwean currency was necessary.

However, because of the country’s entrenched economic ills (although marginally diminishing over the last few years, particularly in 2013 and the current year)some want a reversion to the Zimbabwean dollar. They fail to understand and appreciate that because Zimbabwe is devoid of tradeable, realisable and substantive reserves to support a national currency, the Zimdollar would be as valueless as during the hyperinflation era, hence can weaken the economy even further.

A premature reversion to such a currency would be economically disastrous and most of Zimbabweans will suffer even more.

The emaciation of the money market is one of the many hindrances to a quick recovery of the economy. This is because of the vast needs of all economic sectors, which the money market cannot service adequately.

The insufficient funding of the money market is attributable to several economic factors which include the reluctance by most Zimbabweans to use banking and allied services.

On one hand, they are conscious of the failures and closures of several financial institutions over the last few years, with many depositors losing their money.

On the other, they fail to recognise the considerable transformation of the financial sector in recent years, mainly at the instance of the Reserve Bank of Zimbabwe (RBZ), and partially at the instance of government in general, and the Ministry of Finance in particular.

Financial institutions have been ordered by the authorities, especially the RBZ, to properly and adequately capitalise to ensure viability and depositor security.

Banks which were unable to meet the capitalisation requirements were obliged to either discontinue operations or to merge with others provided such mergers were aligned to prescribed capitalisation levels.

In addition, the RBZ has increased its monitoring and oversight role of all banks and other financial institutions to ensure there is compliance with operational requirements to maximise effective and secure operations as well as ensure depositor security.

However, most of the population remains unconvinced and resists using the services of the formal system.

The situation is compounded by the belief that if they put their funds in the banks, the broke government would suddenly expropriate those funds, either without compensation to the depositors, or they would be issued with government bonds which are only redeemable after many years, if at all.

They also fear that their funds in the US dollar, South African rand, Botswana pula, British pounds or euros will be usurped by government and replaced by some near-valueless new Zimbabwean currency, which would be unsupported by any substantive resources.

That fear has been fuelled by previous cases in which the RBZ expropriated millions in foreign currency receipts of businesses and individuals in export proceeds and investment funding prior to 2009, almost wholly without adequate compensation.

The move by the central bank then collapsed several enterprises and impoverished many.

Commendably, it is now addressing the issue of compensation and is also providing guarantees that there will be no recurrence of currency expropriations.

However, so great was the prejudice suffered due to previous expropriations that many remain distrustful. They therefore prefer holding their money in safes, wardrobes, wallets and under mattresses.

This is despite security concerns related to keeping cash out of the formal banking system.

The other major contributor to the continuing money market illiquidity is the reluctance by international financiers to further capitalise Zimbabwe’s banks and other financial entities for they are wary of the government’s determination to proceed with its indigenisation policy.

Most of these financiers are willing to partner indigenous Zimbabweans only if they choose the ones they want to partner.

They are opposed to government imposing business partners.

They also require that their partners should contribute on a pro rata basis to the entity’s capital. In the absence of confidence of investment security, most are unwilling to invest.

Similarly, access to international loans is a result of potential lenders being afraid of the security of such loans.

They are apprehensive of a premature discontinuance of the currently prevailing multi-currency system, governmental expropriation of the loan funds, or national policies which would endanger the well-being of the borrowing entities.

Source : Zimbabwe Independent

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