By Ngonidzaishe Makaha, HARARE, May 5 (The Source) – One of America’s great entrepreneurs, the late S. Truett Cathy, once said: “In the Great Depression, you bought something if you had the cash to buy it”.
The Great Depression in its severity saw the world economy recording its deepest slump in the 1930s following the stock market crash in the United States. One of the prominent highlights of the Great Depression was chronic illiquidity, a situation which resonates with S. Truett Cathy’s sentiments on cash at that time.
Zimbabwe is facing secular stagnation or economic immobilism which is a situation of prolonged zero economic growth. As in the Great depression, Zimbabwe is facing severe cash shortages, albeit under different circumstances.
One aspect monetary authorities in Zimbabwe have failed to establish is that the shortage of cash is not a problem on its own, but a result of an underlying economic fundamental. This is why during the Zimbabwe dollar era, things spiralled out of control because of too much focus on the derivative (liquidity) and less focus on the problem (production capacity).
When Zimbabwe adopted the multi-currency system in 2009, with the United States dollar as the primary currency, broad money supply was relatively weak. There was however, significant improvement as the economy gained momentum until gains started reversing with the downturn that started in 2013.
It is now clearthat the liquidity bubble is bursting,as evidenced by the shortages of cash that have dogged the economy since the beginning of this current year.
A lot of economic fundamentals have caused this situation, and they include:
Huge imports versus low exports
Without looking at official statistics concerning Zimbabwe’s balance of payment position, everyday evidence suggests we are importing virtually everything from household consumables, cars, machinery and raw material for industrial use.
Looking at a typical Zimbabwean kitchen or bathroom, how many products have a “Made in South Africa” label on their packaging? The same applies to the few remaining industries where the bulk of raw materials are sourced from beyond the borders.
It is therefore imperative that outflows from Zimbabwe to its trading partners significantly outweigh inflows given that local production capacity is limited and exports are low. This situation is corrosive when it is sustained, as in the case of Zimbabwe, which has been running trade deficits for a prolonged period.
Subdued production capacity and low Foreign Direct Investment
In plain economic terms, the contraction of industrial output is affecting money supply negatively. Money follows production and the local economy can hardly produce, and this is worse especially looking at the state of key sectors such as mining and agriculture.
Take a hypothetical family which grows tomatoes for a living; when yields are low and it happens for successive seasons, the amount of money at the family’s disposal is bound to run low. The family therefore requires a stimulant to reverse the situation.
The stimulant Zimbabwe needs is investment and savings. These are two fundamentals that can prop up the economy and ease some of the liquidity challenges the country is facing.
Low aggregate demand, low incomes and high unemployment
When the factors of production are lying idle, it is absolutely inconceivable to hope for a miracle when the economy slides and liquidity becomes an issue.
Low incomes and high unemployment has led to a situation of low aggregate demand. This situation is damaging as it further impacts on production capacity.
The great economist, John Meynard Keynes,said that demand for money is determined by three motives, which are transaction motive, precautionary motive and the speculative motive.
Applying these three motives to Zimbabwe, the transaction motive has not worked for the local economy considering the fact that we are importing the bulk of the products used for household and industrial use.
The precautionary motive is one which has worked against the financial system, where economic agents prefer to hold their money balances and transact outside the banking system. In Zimbabwe, individuals and firms have lost trust in the financial system due to bank failures.
In a normal economy, speculative tendencies drive people to either save or invest but the situation is critically diametrically opposed in the case of Zimbabwe. The speculative motive in Zimbabwe is largely driven by fear of a return to the Zim dollar era. This can be argued as the reason why people have preferred to hold on to their money rather than using the financial system.
Government spending is a critical component of the economy as it sets the tone for fiscal policy. Over the years, government spending in Zimbabwe has been largely skewed in favour of consumption (wages and recurrent expenditure) as opposed to capital expenditure such infrastructural development, mainly because the country is unable to run a capital budget.
What makes the situation worse is the fact that the recurrent expenditure is met with low local production capacity. On the contrary, in situations where capital expenditure is prioritised especially on projects with a positive internal rate of return, the liquidity position is enhanced through the repo effect of employment and income.
Weak banking/financial system
As financial intermediaries, banks play a leading role in issues to do with liquidity. Evidently, most banks in Zimbabwe are not able to cope with the current shortages.
Some of the banks are liable for the current situation because of poor risk management practices that have led to a lot of non-performing loans, thus impacting negatively on the whole financial system.
The BASEL Accord stipulates a lot of fundamentals that guide banks to ward off liquidity and credit risk, but the current situation where a lot of banks are not able to cope with cash shortages exposes their non-compliance to basic tenets governing risk management.
The wrong diagnosis
To ease the problems of cash, the Reserve Bank of Zimbabwe has announced the introduction of bond notes. Considering that the bond notes are backed by a US$200 million facility from AfreximBank, there is hope and guarantee that the bond notes will only be a fraction of the United States dollar holdings which are approximately around US$3 billion.
However the bond notes are just a short term solution as the problem of liquidity will still resurface in the long term.
The problem with Zimbabwean policy makers is that they overlook real problems and use the wrong diagnosis.
Has there been a proper risk analysis to ensure that the introduction of the bond notes will not affect the foreign reserves already in the system? Remember, economists always say bad money drives out good money. Not to suggest that bond notes is bad money, but it is imperative that such major decisions that have a hugebearing on the economy be subjected to a lot of scrutiny and risk analysis.
It is important that monetary authorities return to the basic tenets of economic management. Cash shortages or illiquidity is not a challenge on its own, but a derivative of underlying economic implosion. This is not the time to be looking at solutions for the cash crisis. It is time to look for solutions for the economic problems bedevilling the country so that liquidity is guaranteed in the short to long term.
NgonidzaisheMakaha is a financial consultant based in Harare. He can be contacted onemail email@example.com and on Twitter: @ngonidzaishe