The Sunday Mail
Makomborero Mutimukulu and Lincoln Towindo
The Zimbabwean economy continues to choke under the weight of a liquidity crunch that has divided opinion over its causes as well as possible remedies.
Government says the country is paying the price for a negative trade balance with Finance and Economic Development Minister Patrick Chinamasa repeatedly calling for increased capacity utilisation.
He argues that the country is in fact exporting money and jobs through the importation of just about everything, from fuel to match sticks.
Zimbabwe has essentially become a source of hard currency for the region with estimates suggesting that individuals and businesses are shipping US$3 billion out of the country annually.
Quite staggering for such an economy!
While Government claims at least US$7,4 billion is circulating in the informal sector, the Zimbabwe Revenue Authority (Zimra) appears clueless on how to tax this sector.
Economic observers say the sum of these factors has contributed to the current liquidity crisis.
Going forward, Government says let us increase capacity utilisation and cut the imports.
However, the manufacturing sector, which is reeling from an avalanche of cheap imports from neighbouring South Africa and Asia, argues that it cannot boost production due to the high cost of money, astronomical production costs and depressed foreign direct investment.
According to the Confederation of Zimbabwe Industries 2013 manufacturing sector survey report, factory capacity utilisation fell to 39 percent from 44 percent the previous year.
The Reserve Bank of Zimbabwe’s inability to perform its role as a lender of last resort has further exacerbated the situation.
However, last month’s unveiling of a US$100 million Afreximbank facility has gone some way in easing the crunch although this, as noted by Mr Chinamasa, is not the panacea.
The US$100 million facility has operationalised interbank trading.
The overarching effect of the facility is that it has unlocked fresh capital into the productive sector for financing of operations.
Zimbabwe National Chamber of Commerce macro-economics committee chairperson Mr Brains Muchemwa believes that the liquidity crunch is a result of high levels of under-performing loans.
“Contrary to the widely held misleading belief that the liquidity challenges are largely stemming from our huge current account imbalance, the correct and verifiable fact is that the very high levels of non-performing loans in the banking sector are the major causes of the liquidity gridlock in the economy,” he said.
“Zimbabwe, on account of not having a reserve requirement at a time the loan-to-deposit ratio is around 80 percent, should be enjoying considerable expansions of broad monetary aggregates, more so when one takes into account the obtaining high interest rates.
“Therefore, on account of the foregoing, there shouldn’t be any significant liquidity problem. However, out of the US$3,7 billion loans issued out there, a significant portion is non-performing and hence the banking sector has no capacity to continue creating new loans to satisfy the demand for credit and that, in the process, creates the liquidity gridlock.
“The big corporates that sucked liquidity out of the banking sector and have been failing to repay their loans are the major culprits. The thinking that we are the source of foreign currency in the region in that we are exporting $3 billion annually is as erroneous as trying to solve a quadratic equation that has no equals sign.
“What is most important is to scrutinise how, in a dollarised environment without external financing arrangements, Zimbabwe had been financing the current account imbalance and affording an annual net outflow of US$3 billion.”
Minister Chinamasa, however, argues that the solution to the liquidity crunch lies in the ability of the productive sector to produce.
At the unveiling of the US$100 million Afreximbank-financed interbank facility, the Treasury chief said: “You have to produce as a country. You have to produce as an economy; you have to produce goods and services and to produce, we need the support of the Afreximbank to support our productive sector, especially agriculture.
“Tourism support is given . . . only when the productive sector is producing goods and services to sell and export can we resolve this challenge.”
A research paper prepared by University of Zimbabwe lecturer Professor Ashok Chakravarti titled Liquidity Challenges in Zimbabwe: Turmoil and Tenacity details how factors such as the Central Bank’s inability to use quantitative easing as a tool for addressing the liquidity crisis is a major hindrance to efforts aimed at curbing the problem.
Quantitative easing was the tool of choice preferred by most Western countries during the global economic recession.
Prof Chakravarti also identifies Zimbabwe’s negative balance of trade, low foreign direct investment and depressed remittances from the Diaspora among the causes of the liquidity crunch.
“The country has to re-engage the world on a multilateral and bilateral basis. This would be more beneficial if done first and foremost with the international financial institutions i.e. the IMF, World Bank and ADB,” reads the paper in part.
“A general re-engagement opens the country to old and new financial relationships. Floating bonds could help ease the country’s liquidity but the uptake of bonds is determined by the trust that potential buyers have in the repayment history of the issuers.
“The Central Bank’s lender of last resort function needs to be restored. This will enable banks to lend more and resort to the Central Bank when in a deficit position.
“In line with this, the restoration of the interbank market like the one underwritten by the Africa Export Import Bank is urgently needed.”
He added that Government needs to reverse the widespread perception of “incoherent and ineffective economic governance”.
Prof Chakravati also urged Government to compensate individuals and private corporates whose foreign currency accounts were raided before the introduction of the multi-currency system.
With Government now forking out US$155 million to pay its 230 000 workers monthly, there is urgent need to deal with the liquidity crunch.
Zimra is reported to be keeping a hawk’s eye on diamond and gold mining companies as it seeks to improve revenue collection.
However, Zimra’s Commissioner-General, Mr Gershem Pasi, reckons Government needs to think outside the box when it comes to dealing with the mining sector.
Mr Pasi recently urged Government to consider collecting a percentage of the minerals mined in the country instead of waiting for its share of dividends from indigenised mining firms.
The pointer came amid growing concerns within Government that the mining sector, which has been identified as the centrepiece of the country’s economic revival, is not contributing optimally to the fiscus.