Liquidity: The elephant in the room

19 Jun, 2016 - 00:06 0 Views
Liquidity: The elephant in the room n The US dollar, SA rand, British pound, euro, Botswana pula, Australian dollar, Chinese yuan, Japanese yen and Indian rupee are legal tender in Zimbabwe n One can request any of these currencies from their respective banks n Real Time Gross Settlement transactions can be made using any of these currencies n The US dollar remains in circulation n Exporters can receive money in currency of their choice n RBZ will maintain a multi-currency pool n Payments to Government departments or parastatals can be made in any of the nine currencies n Foreign tourists and the public can transact using money of their choice

The Sunday Mail

Dr Gift Mugano
Reducing bank charges is a very good move that should have been taken when the multi-currency system was introduced in 2009. In fact, this is what Reserve Bank of Zimbabwe Governor Dr John Mangudya should have done instead of announcing introduction of bond notes. If bank charges had been rationalisedwell before that announcement, bank deposits and savings would have improved significantly. It is fact that many people feared keeping their money in banks due to inflated charges.

Now there is a combined effect of bond notes and lack of liquidity. Therefore, we have to work on rebuilding confidence in the banking sector, and this requires more public awareness on how bond notes will work. The spending side in particular should be explained.

When exporters receive the bonus, to whom will they give the bond notes? Will they retain them in their accounts and then redeem them with the Reserve Bank of Zimbabwe upon importing critical inputs or they will pay wages?

If bond notes remain with exporters and are not transmitted to the public, the generality of Zimbabweans will not be worried once that has been fully explained. We can rebuild confidence and money will find its way to banks.

The big elephant in the room is limited liquidity, and we must appreciate that addressing that disease is not the RBZ’s role alone. The RBZ has to restore its lender-of-last-resort capability, a difficult proposition in a dollarised environment.

Hence, the central bank/Ministry of Finance needs to urgently secure lines of credit from international financial institutions or those amenable to our debt problem.

Second, we need to work very hard on addressing investor concerns to attract FDI by virtue of maintaining the US dollar in circulation as Panama and Ecuador did.

Naturally, Zimbabwe, with a well-educated workforce, good geography (favourable climate, good location and enormous natural resources) and a fully dollarised economy, should create impetus to attract billions of dollars in FDI. This should be a very serious consideration which may even require Government to bite the bullet on indigenisation law.

Third, knowing that the US dollar is a vehicle currency for international settlements, it follows that Zimbabwe has become a hunting ground from genuine businesspeople like retailers and criminals like drug traffickers.

Against this background, stringent regulations must be put in place, and should include the Ministry of Home Affairs, Zimbabwe Revenue Authority, the RBZ and other relevant institutions. This has to go beyond terms of reference of the recently-established foreign exchange committee on import regulation.

That committee is a real pregnant mother who will give birth to twins of financial crisis and severe shortages and associated grandchildren of job losses, company closures and inflation. The RBZ will not have capacity to regulate over 10 000 types of imports ranging from tooth picks to fizzy drinks.

Rather, Government ministries must work on enacting a local content law urgently to curb unnecessary imports. Knowing that FDI, aid, remittances and exports – the four cylinders that must help us raise liquidity – are not firing properly, we need to seriously consider adopting the South African rand as an official currency.

This will help us raise export competitiveness as the rand has depreciated so much in recent years, although there is risk of import-induced inflation. Government will have the opportunity to get a share of seigniorage which will be quite useful in financing the National Budget.

In addition, the rand is not prone to the threat of money laundering and other forms of capital flight as is the case with the USD. However, this requires a political process of joining the Southern African Customs Union and associated loss of sovereignty.

Increasing national cake
We are all in agreement that a wage bill of about 83 percent of the total budget is unsustainable as it leaves no room for development. Against this background, rationalising the civil service is noble if it works around streamlining ministries and various Government departments to eliminate duplication, ghost workers and some unnecessary positions like principal directors.

With respect to streamlining, some ministries, which I don’t want to mention for professional reasons, duplicate functions, resulting in policy co-ordination and implementation difficulties.

To make it easier for readers to understand, we are a small country with a lot of problems. We don’t require around 30 ministries with deputy ministers who are largely invisible and cannot even take up an acting role when the minister is away.

So, if rationalising the civil service works around removing some irrelevant ministries, ghost workers and irrelevant positions, then yes, this must be done. Of course, I must warn that if we over-massage our numbers in reducing the civil service without addressing fundamental issues, we risk disabling our institutions, thereby bringing serious challenges.

You see, institutions work well when everything is all right, but if there is market failure or there is disturbance in the system, the impact of institutional failure is visible and painful.

Imagine you wake up in the morning and you want to get a burial order and you cannot get it because the workforce has been rationalised to align it to the so-called 40 percent range of the total budget.

There will be chaos!

If we deal with these issues without addressing the fundamental problems of our economic challenges, we will not reduce the wage bill from 83 percent of the National Budget significantly. We need to deal with ways of increasing the national cake. Our budget of US$3,5 billion is not something we should crack our heads in apportioning.

In my humble view, we need to deal with policy reforms aimed at attracting foreign direct investment so that we can arrest economic decline and build the formal sector again. The current state of affairs where the informal sector is now dominant is a difficult one since it is very hard to tax.

I am sure we are all aware, based on World Bank research in 2012, there is US$7,4 billion circulating in the informal sector and over 98 percent of players are not paying taxes.

Inasmuch as we are working on formalising the informal sector which will then help in growing it and in financial inclusion, we must admit that some informal activities like vending must just die and those people must be taken up in formal businesses.

Of late, currency issues have become thorny. We are largely using the US dollar which does not provide us with seigniorage, that is, profit from printing money, which is very strong. This damages our competitiveness and makes us susceptible to all evils around money laundering, externalisation and capital flight.

If we keep looking without providing a reasonable solution, though imperfect like adopting the South African rand, we will not be able to grow this economy. Above all, we need to invest our minds, resources and efforts in raising productivity across all sectors of the economy.

Dr Gift Mugano is a research associate and visiting lecturer, author and expert in trade in the Department of Economics and Economic History at Nelson Mandela Metropolitan University in South Africa

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