Liquidity crunch: The convenient scapegoat

13 Apr, 2014 - 00:04 0 Views

The Sunday Mail

Brains Muchemwa Motivation
The issue of the liquidity crunch has now taken a toll on the economy. In many quarters, the issue has become the convenient scapegoat for any form of poor performance and indeed policymakers need to be wary of the likely changes in demographics that will rob the economy of future workforce as couples, on account of the liquidity crunch, might be postponing bearing children.

Recently the market has been awash with information on the performance of the economy as financial results for listed companies in the year ending December 2013 are being released.

A perusal of that section that reads “Chairman’s Statement” on almost all results published has revealed that indeed the liquidity crunch has taken a toll on most of the companies’ performances. Just before dollarisation in 2009, industry complained bitterly about the state of the economy and indeed it was justified. Every other company explained its poor performance on account of high inflation, shortages of foreign currency and, of course, the Government administered price controls.

There was consensus among industry back then that if these could be addressed, industry would be able to retool, employ, produce, sell at a profit and be happy forever thereafter.

Unfortunately or otherwise, dollarisation cured all these challenges in one big swoop. Now that inflation is hovering worryingly below 1 percent, with that much needed foreign currency now being the local currency in a liberalised pricing and import regime, surely the conditions should be the most ideal for industry to be progressive.

But alas, another unforeseen challenge has cropped up and that relates to the liquidity crunch. All of a sudden, every company that is failing to deliver values is heaping the blame on the liquidity crunch.

From the likes of Meikles, Hwange, Zeco, Border Timbers to almost every other company that published results, it has become impossible to miss the word “liquidity” in the preamble or explanation on why the company could not have done the best under the current circumstances.
Indeed the thinking that the liquidity crunch has created many problems for companies in Zimbabwe is not a faulty one. Liquidity crunch has seriously dented aggregate demand and the cost and access to credit has been pushed beyond the reach of many.

In fact, with the bankers having burnt their fingers on non-performing loans at a time when their shareholders expect them to safeguard capital, more selective approaches are being applied in the credit granting process.

The annual decline in private sector credit growth from 28,77 percent in February 2013 to only 1,5 percent in February 2014 bears testimony to banks responding to the attendant risks presented by the prevailing liquidity crunch. Elsewhere, able governments have been making frantic efforts to ensure that the banks continue to provide credit so as to sustain production and preserve jobs.

The term quantitative easing has become very popular since 2008. Basically QE entails the central bank printing loads of money and stuffing it on bank balance sheets to ensure that credit continues to flow in the economy. The now popularised quantitative easing programmes that have been adopted by most of the developed countries from 2008 to date have been a direct and persistent response to ensure that the credit markets does not cease.

The US has been pumping $85 billion monthly onto banks’ balance sheets by buying toxic securities and bonds from banks since the onset of the financial crisis. This massive programme has since injected a whooping $4 trillion dollars into the American economy since 2007 and this has all been in an effort to save economy from recession.

In Japan, after 20 years of uncomfortable deflation, prices are finally rising thanks to relentless quantitative easing efforts. Although QE received applause in the early days, opinion is now growing that the programmes have extended longer than anticipated.

The hoards of cash being pumped into these economies may soon create structural challenges relating to inflation and may even promote the same reckless behaviour among bankers that triggered the sub-prime mortgage crisis in the first place.

The IMF, seemingly undecided on how to advise economies on the way forward with regard to QE programmes, recently issued a middle of the road opinion on the US QE programme in its Global Financial Stability Report.

The situation is, however, different for Zimbabwe. Because of the dollarisation, the policy makers have little room, if at all, to inject liquidity into the economy to give banks more confidence and ability to lend. Although efforts have been made and continue to be made by Government to arrange bi-lateral and multi-lateral lines of credit for the economy, the reality remains that lines of credit are more often very specific and have stringent conditions.

Resultantly, most lines of credit from multi-lateral institutions that have been availed to Zimbabwe banks have remain largely underutilised.
To therefore expect that this country will access significant lines of credit that will have a marked impact on the liquidity position of the economy is probably expecting too much.

Equally important is to understand that lines of credit are just loans and therefore will eventually need to be repaid at some point. However, considering the state of the Zimbabwean industry and the fact that most of the companies are troubled, it remains highly unlikely that these lines of credit will, like QE, ease the cost and access to credit for the needy corporates.

It is therefore no surprise that most of the bilateral lines of credit that may be dangled to Zimbabwe are “Buyers Credit Schemes” as correctly captured by the ENS Economic Bureau of India on March 30 2013 in reference to the proposed $400 million line of credit from India.
These bilateral credit lines will mostly benefit the offerers as they will only consider lending to Zimbabwean companies that would be buying products or services from their country.

In essence, Zimbabwe’s capital account will remain unchanged and as fragile while the current account will deteriorate further. Zimbabwe will, in such instances, therefore be a net recipient of finished goods from these offerers of lines of credit, implying therefore that the attendant liquidity challenges affecting this economy will compound further even after accessing some of these lines of credit.

During this era where every country is looking at ways of preserving jobs and building up foreign exchange reserves, it would be expecting the very unusual to get significant bilateral lines of credit that would, in essence, create significant jobs in Zimbabwe and assist in the production of final goods.

It is not surprising therefore that the likes of SA and Botswana, whose economies have benefited immensely from the economic downturn in Zimbabwe, would be the last to organise lines of credit for Zimbabwe.

These countries would rather create more jobs at home, grow their incomes and export goods and services to Zimbabwe than assist the revival of Zimbabwe industries that would compete with their export-oriented companies.

At the worst case, they would rather import jobs from Zimbabwe to fill up their deficit areas than help Zimbabwe industries come back onto their feet.

Indeed it should not come as a surprise that the $70 million line of credit from Botswana never materialised since the signing of the MOUs in 2010, while the inclusive Government chase for a promised R1,5 billion line of credit from SA draw blanks.

Surely one cannot blame SA or Botswana. Zimbabwe would have done the same if it were in either of their positions. All economies are driven by the selfish desire to create and protect their citizens’ jobs while at the same time doing everything necessary to grow their incomes. It is for this reason that bi-lateral and multi-lateral trade negotiations have always been burning issues, the reason why up to this day there is hardly any convergence in regional and global trade protocols.

It therefore does not come as a surprise that Russia joined the World Trade Organisation on August 22, 2012.
Considering the foregoing analysis on the motivations around bi-lateral lines of credit, the thinking and expectation among Zimbabweans that significant lines of credit will, at one point, be secured to address the liquidity challenges is therefore erroneous.

With this full information that the liquidity situation is less likely to improve anytime soon, to see companies continue mourning about the liquidity challenges is really sad. What is important is to understand that the liquidity crunch is a culmination of the sum actions of mostly the big corporates that borrowed money from the banks and failed to repay.

A cursory look at most of these same corporates that are blaming the liquidity crunch for their misfortunes reveal that indeed they are sitting on huge bank loans they are struggling to repay in one way or another.

A number of the failed institutions have so far gone down the drain with bank loans, in the process taking liquidity with them to the grave.
The recently collapsed banks have met their fate on account of non-performing loans, be they to insiders or otherwise. It is inconceivable how this economy, without the reserve requirement to restrain broad money supply growth in the face of high loan-to-deposit ratio and high interest rates, would experience a liquidity crunch of the magnitude being felt.

Brains Muchemwa is an economist. He writes in his personal capacity and the views contained herein do no represent or reflect the position of the organisation(s) that he may be associated with.

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