How to fix the cash squeeze

Over the last few weeks, local media have been awash with reports of “debilitating” cash shortages.

Monetary and fiscal authorities have explained this illiquidity as being the result of civil servant salary payments, staggered payment of 2015 Government bonuses and the tendency by many not to keep money in banks.

Basically, the shortages are a direct result of cash outflows outstripping inflows, thereby creating gaps (shortfalls) in the availability of money in the banking system.

While cash in the system can be quantified with a reasonable degree of accuracy, the same cannot be said of sums that circulate outside formal channels.

Foreign currency inflows — the supply side of the US dollar — derive mainly from banked export receipts, Diaspora remittances, NGOs and international institutions, external loan proceeds, aid, grants and foreign investment that encompasses investment income and royalties earned off-shore.

On the other hand, foreign currency outflows — the demand side of the equation — consist of imports, loan and capital repayments, service payments, unsanctioned and unproductive investments, other cross-border investments and smuggling of precious minerals, wildlife horns and trophies.

Externalisation of funds by corporates and individuals, offshore retention of export proceeds, unwarranted offshore investments and remittances, trade mispricing and wholesale leakages under illicit financial flows also constitute foreign currency outflows.

All these deplete national foreign currency stocks or deny an economy such resources altogether.

From a fiscal perspective, these outflows also come in the form of tax evasion/avoidance, porous borders, misappropriation of foreign loan receipts, irregular expenditure, over-expenditure and/or wasteful expenditure and corruption, particularly on procurement.

Illicit financial flows (IFFs) have attracted keen global attention following the leakage of over 11 million papers/documents relating to the Panama scandal, which has its roots in tax evasion perpetrated on the back of shady offshore companies.

It is a burning issue with potential to expose the full scale of the rot and trigger appropriate measures to prevent IFFs globally.

A mismatch between cash outflows and inflows leads to periodic shortages and/or surpluses of foreign currency balances.

I propose the following measures to help manage such mismatches:

Short-Term (April to December 31, 2016)

1. Finalising the facility being arranged with the Africa Export-Import Bank to close the present liquidity gap.
2. Ongoing tobacco sales should be good news, especially as farmers are now required to process earnings through banks. Increased tobacco exports should be able to help with liquidity.
3. Fully utilising the US$50 million facility secured for bond coins, and speeding up the roll-out of these coins by settling part of the outstanding domestic debt.
4. Releasing Zimbabwe dollar coins into the money market (for change purposes mainly) and keeping them at par with bond coins and US cents. These Z$ coins, just as in the case of bond coins, have the added advantage of retaining liquidity as they do not lend themselves to being convenient for import purposes.
5. Increasing fuel import duty and other fuel taxes and the Value Added Tax rate from the present maximum of 15 percent. These measures should find expression, at the very latest, in the Mid-Term Fiscal and Monetary policy statements as fuel prices on the global market have started creeping up to around US$40 per barrel, having dropped to US$28 per barrel in early 2016.
6. Entities which use the Salary Service Bureau for stop orders should be charged at least five percent, up from the current 2,5 percent. The extra revenue generated can be utilised to finance, say, Zim-Asset programmes.
7. Settling all arrears with Chinese entities so that Sinosure will be in a position to guarantee new funding from the Asian economic powerhouse. That may have a positive impact on Zimbabwe’s liquidity position.
8. Settling arrears with multi-lateral institutions as agreed in Peru last year will also improve Zimbabwe’s risk profile.
9. Instituting legal suits for possible compensation, particularly pertaining to the over 100 000 tonnes of diamond ore from Chiadzwa exported on the pretext of “sampling and testing”.
10. Investigating the case of the diamond carats worth US$15 billion that have not been accounted for in recent years.
11. Instituting legal suits for compensation for atrocities committed by colonialists against indigenous Zimbabweans during the First and Second Chimurenga.
12. Mounting diplomatic offensives on US president Barack Obama to achieve relief from the illegal sanctions imposed on Zimbabwe. This no longer appears like a far fetched idea given the Cuban experience.
13. Operationalising the proposed Commercial Cases Court (Economic Crimes Court) for ease of doing business, among other reasons.
14. Giving State guarantees on all 99-year leases and special permits for A1 and A2 farmers to make the documents bankable.

Medium-Term (January 2017 to December 2018)

1. Setting up a Gold Reserve Bank as articulated by global experts and consultants and simultaneously introducing a gold currency to attract international capital.
2. Continuing to pursue legal suits, and working on the repeal of Zidera.
3. Seeking debt forgiveness as the first option to Western creditors, highlighting that inability to service debt was occasioned mainly by illegal sanctions.
4. Reducing taxes on fuel and the rate of Value Added Tax so that SMEs start contributing PAYE and company taxes.

Long Term (2019-2027, in three-year phases)

1. Targeting Phase One of our three-year plan to reintroduce the Zimbabwe dollar once our set macro-economic fundamentals have been attained. This will restore the Reserve Bank of Zimbabwe’s capacity to print money and manage liquidity as the sovereign State that we are.
2. Introducing a regional currency for Sadc and a continental one in late 2018 or in Phase One along the lines of the euro. I do not support using the rand as a regional currency given its recent steep devaluation against the US dollar.
3. The gold currency alluded to above may come in as the local, regional, continental or even our global currency of choice. It is important to remember that measures towards improving liquidity like reducing imports and/or increasing export receipts cut across all three time-frames.

They all have common features and strategies for their attainment: export receipts being enhanced mainly by value addition. In essence, this implies industrialisation with a view to manufacturing finished products locally.

On the other hand, import reduction calls for import substitution measures such as blending petrol with ethanol and hiking import duty and taxes for products that can be found on the domestic market to discourage their importation.

Improving administrative border controls and monitoring may also reduce smuggling and curtail other IFFs, thereby improving revenue collections.

Edmore AM Ndudzo is the first black City Treasurer of the City of Harare, and was the lead consultant in the compilation of the Public Finance Management Act of 2009