THE Zimbabwean economy is currently experiencing a liquidity crisis which has been a problem for quite some time.
Banks feel the effects of the liquidity squeeze directly while other productive sectors in the economy perceive it indirectly.
There are questions that arise because of the liquidity crunch. What is liquidity? What are the causes of the liquidity crunch in Zimbabwe? What are the main effects of the liquidity crisis? How can the effects of the liquidity crunch be alleviated?
In monetary economics or finance liquidity refers to the degree to which a financial asset or instrument is near to cash. In modern parlance the term has come to mean the nearness or proximity of a financial asset to purchasing power.
A financial asset is anything ranging from a bond to commercial paper that acts as a substitute for holding cash. It must be noted that when people decide to hold onto their cash instead of depositing it with the banking system, they forego the possibility of earning interest that may be associated with such deposits.
They also run the risk of being penalised by inflation if prices of commodities escalate in the long term.
There are several reasons that explain the current liquidity crunch in Zimbabwe. Firstly, it is worth observing that the current version of tight liquidity actually began in 2009 when the economy embraced the multi-currency dispensation. Liquidity problems existed before dollarisation.
Prior to dollarisation there was tighter liquidity than at present because most people had trillions or quintillions of Zimbabwe dollars in their accounts that they could not withdraw from the banking system. The reason they could not withdraw their quintillions prior to dollarisation was because the printing presses of the Reserve Bank of Zimbabwe (RBZ) under governor Gideon Gono (pictured) could not keep pace with run-away or hyperinflation.
The decision to formally dollarise in 2009 must, therefore, be viewed as a strategic move which ensured the economy would reap benefits of price stability at an opportunity cost of tight liquidity.
The question is how can tight liquidity be the opportunity cost or the downside of dollarisation or the multi-currency dispensation?
Tight liquidity in an economy is the corollary embracing other countries’ currencies as legal tender because this entails the loss of monetary sovereignty or the ability to create money supply by printing notes and minting coins.
Secondly, liquidity problems have been worsened by the systemic risk and weak corporate governance structures and systems in the banking sector which have led to the collapse of a number of banks in the 2000s, that is, from 2002 to 2013. Most potential depositors just like any economic agent use past experience or history to make future decisions.
According to conservative estimates more than $1 billion is circulating outside formal banking channels implying that the informal sector which employs many so-called unemployed is actually more liquid than the formal sector. There is visual evidence which attests to the fact that the informal sector is very liquid.
For instance it never runs out of commodities. Nearly all flea markets and small shops in Zimbabwe’s major cities and towns are always stocked with all sorts of wares. This must imply that the owners of those shops or retail outlets are accessing business liquidity from somewhere other than the formal banking system.
In fact, most key players in the informal sector do not do any meaningful banking of their turnover or sales revenue.
High bank charges are one of the reasons why informal sector business people do not bank their cash. Zimbabwe is one of the few countries in the region where depositors are actually “penalised” by unreasonably high service charges for injecting their liquidity or purchasing power into the banking system.
In most countries depositors are actually incentivised to save more by being offered an interest for parting with their purchasing power.
The major effects of the liquidity crunch are the ongoing downsising by firms that cannot access credit from banks to fund their operations, closure of financially distressed firms and an increase in the unemployment rate.
As firms close some skilled people are forced to seek greener pastures in other countries hence the massive brain drain that Zimbabwe continues to experience. This means that turning the brain drain into a brain gain for Zimbabwe would involve solving the current liquidity crisis.
There is great need for concerted action from all stakeholders in a bid to solve the problem of tight liquidity. The central bank has a great job of stabilising the whole financial system so that confidence levels in it may improve.
A combination of macroeconomic policies and viable projects are the only way out of the current liquidity crunch. The next article will explore the various measures that may be put in place to deal with the problem of tight liquidity.
Ian Ndlovu is an economics lecturer at the National University of Science and Technology. He researches on e-commerce, business and development issues. He writes in his personal capacity.