The Sunday Mail
Persistence Gwanyanya
Being a commodity-dependent economy, policy makers should have anticipated the impact of impending global commodities price rout on the country’s liquidity situation.
WHEN the multiple currency system was mooted, policy makers and the generality of Zimbabweans were desperate for a solution to the hyperinflation scourge that was making life unbearable.
It is for this reason that not much thought was given to the possible challenges that the new system could bring.
Economists often say solutions to one crisis breed seeds for another.
Policy makers should have anticipated the possible challenges of the new system and taken measures to at least minimise them at the point of changeover.
It could have been forecast that the new system will make the economy more susceptible to liquidity constraints.
By then it would have been easy to come up with proactive measures to militate against this at an early stage.
The thrust towards the use of plastic money together with necessary exchange control measures could have been more effective if they were introduced at or immediately after dollarisation as rules to the new ball game.
The economic conditions and circumstances of dollarisation suggest that the country was most likely going to face liquidity challenges in the new currency regime.
Being an unbalanced economy with high levels of consumption and imports against low levels of production, savings and exports, it was only a matter of time before the country started to experience liquidity challenges. This, coupled with loss of autonomy to print money, made Zimbabwe more vulnerable to liquidity problems.
The sources of liquidity, which include exports, foreign investments (mainly portfolio and foreign direct investments) and external lines of credit (including grants) were underperforming due to a number of factors. On the other hand, the country’s import bill, overdue foreign loan obligations, grants and foreign allowances were high, suggesting that demand for liquidity was going to outstrip supply.
Tight global economic and financial conditions coupled with anaemic economic recovery could not help the country’s situation.
This meant that the bullish global commodity market was going to be short-lived and global commodity price rout was in the making.
Being a commodity-dependent economy, policy makers should have anticipated the impact of impending global commodities price rout on the country’s liquidity situation.
Even the slowdown in the global economy should have indicated that the flow of funds from the Diaspora was not going to remain the same.
Also, given the high level of informal sector in Zimbabwe, attracting liquidity into the formal sector was going to be difficult.
RBZ should have anticipated a future problem from all these indicators.
Proactive measures were needed in order to limit the impact.
What immediately comes to mind are the measures that the RBZ introduced way after dollarisation as liquidity challenges took a toll on the economy.
These include promotion of a cashless society underpinned by increased use of plastic money.
Plastic money is an alternative to the physical notes and coins. It comes in the form of credit cards, debit cards, prepayment cards, smart, visa and master cards among other payment solutions that run on electronic payment platforms.
The use of plastic money reduces the need for physical cash.
In advanced economies like the US, it is estimated that over 80 percent of consumer spending is cashless, which reduces the headache of cash shortages.
On the contrary, Finscope estimates that about 76 percent of Zimbabwe’s population is unbanked and the use of cash is extensive.
This is despite the fact that the country cannot print money to support high cash demand.
My take is that the best timing to promote the concept of plastic money would have been at the point of dollarising.
At that point, it was easy for the Reserve Bank of Zimbabwe to issue a directive requiring the transacting institutions to invest in the facilities that support plastic money whilst dissuading the high use of physical cash.
However, we waited until 2015, when the biting effects of liquidity challenges intensified, to aggressively promote the concept of plastic money.
The campaign towards increased use of plastic money will be less potent than it was going to be at or immediately after dollarisation as the market is naturally not very comfortable with controls especially after a problem has emerged.
Controls are often misunderstood and misconstrued and may even exacerbate the underlying problem.
That is why I see the period of dollarisation as a missed opportunity to change the structure of the economy from the high usage of physical cash to a cashless society.
If Government had embraced the concept of plastic money earlier, it was going to enhance credit creation by banks due to a more stable deposit base.
Given low demand for physical cash, it was going to be easy for banks to lend out a greater proportion of their deposits to the benefit of the whole economy.
In America, for example, banks could lend far more money than the physical cash in circulation because of high usage of plastic money.
Quantitative easing involved creation of trillions of electronic money to boost the US economy from the global economic crisis.
Contrary to this, when the RBZ created some artificial money through issuance of Treasury Bills (TBs), a number of analysts expressed concern, arguing that this would result in liquidity crunch as long as the preponderances towards physical cash remain.
This was not going to be a big issue if the usage of plastic money was high.
At dollarisation, the country could not anticipate the need for some exchange control measures to minimise the flow of liquidity out of the economy.
Given the scarcity of liquidity, it was in the best interest of the country to protect the little liquidity available in the country.
At dollarisation, all the money in the country became free funds, which could be exported without any restriction.
This made it easier for anyone who wanted to externalise money to do so.
It was only in the 2016 Monetary Policy Statement that the RBZ ruled out the concept of free funds and imposed some controls on the maximum cash withdrawal limits and amount that can be carried out of the country.
A maximum daily cash withdrawal limit of US$10 000 was set and it now requires reasonable notice of at least one day to withdraw US$10 000 or more from a bank.
The maximum amount of cash that can be carried out of the country was pegged at US$5 000 and banks were directed to maintain a maximum of 10 percent of their deposits in their Nostro Accounts (bank’s account maintained by other foreign banks).
These measures were necessitated by the increase in illicit financial flows.
It is estimated Zimbabwe lost around US$2 billion in illicit financial flows in 2015 — about 55 percent of exports of US$3,6 billion recorded in the same period.
It is also alleged that an estimated US$15 billion was siphoned from Chiadzwa diamond mining, depriving the country of liquidity to support productive activities.
These statistics highlight the need to protect scarce foreign currency, which might have led to the introduction of the said controls.
However, as highlighted earlier, these controls could have resulted in a run on deposits which exacerbated the situation.
Some rent-seekers started to sell cash at a prices of as high as 1 percent, taking advantage of cash shortages. My view is that if these controls were initiated at dollarisation as part of the conditions for the multiple currency system, they were going to be more effective.
Despite the timing issue highlighted above, I don’t think the RBZ and banks are doing enough to promote the use of plastic money.
The cost of banking, especially maintenance fees and transaction costs, remain high and unsupportive of financial inclusion.
The idea of free banking is not being well-marketed and a small proportion of the population is enjoying this facility.
Reducing the cost of banking, in my view, would help in attracting more clients into the formal banking system, which will concomitantly improve the country’s liquidity situation.
Effective promotion of plastic money requires that Government embrace this concept at all its institutions by establishing the necessary facilities such as point-of-sale solutions at these institutions, which make up the bulk of institutions in the country.
These include schools, universities, hospitals, parastatals and quasi-government institutions such as GMB, NRZ and Zimra among others.
Surprisingly, there is still extensive use of cash at these institutions.
Being the biggest employer, Government should do more to promote plastic money, especially in view of the fact that it pays its employees electronically.
The RBZ should also raise the bar in its campaigns to raise awareness on the merits of using plastic money.
A look at the extent to which STEM is being marketed, ostensibly because of its strategic importance, demonstrate that more work needs to be done.
Rebalancing the economy towards a cashless society will be supported by creation of an extensive payment eco-system which may involve overhauling the archaic, inefficient and costly payment system that currently characterise our payment eco-system.
Persistence Gwanyanya is an economist, banker and member of the Zimbabwe Economics Society. He writes in his personal capacity. Feedback: [email protected] and WhatsApp +263773030691
