Liquidity shortage in Zimbabwe: myth or reality

Voluminous bagfuls of hot air have been spent by various economists of different ideological stripes debating about the alleged shortage of liquidity in the Zimbabwean financial system. The question which arises is: what exactly is liquidity? To the man in the street like this writer, liquidity generally refers to the availability of cash within the financial system. But of course Zimbabweans are now much wiser than that. Almost all of them know only too well that the excessive availability of cash is much more fatalistic than the supposed shortage of liquidity. Not long ago almost everyone (including children) had a trillion Zim$s in their back pockets. There was liquidity!. But did this liquidity really assist Zimbabweans in any way? The big answer is of course not at all.

This brings us back to the question of what exactly is this liquidity monster then?.  What is this alleged shortage of liquidity? In general, the role of a responsible and functioning central bank in a typical economy is to alleviate liquidity shortage through its role as a lender of last resort. However, in the case of Zimbabwe, everyone knows the irresponsibility and the recklessness of the central bank that led to excessive provisioning of liquidity thereby suffocating the economy to death through hyperinflation. It is an established economic truism that excessive money supply (.i.e. excessive infusion of liquidity) causes hyperinflation (inflation that has gone berserk as was the case in Zim during the dog-eat-dog years leading up to the introduction of the multicurrency system in 2009). It is worth mentioning that the Reserve Bank of Zimbabwe  has ceased to be a lender of last resort since it cannot print money anymore.

From the foregoing, it is crystal clear that the alleged liquidity crisis in Zimbabwe was not caused by lack of access to cash (Zim banks and people had trillions in their vaults, under their mattresses and pockets). In fact it was too much liquidity that killed many Zimbabwean banks. Bank failures through bankruptcy were the chief cause of the alleged shortage of cash within the Zimbabwean economy. Bank failures in Zimbabwe caused a contagion (systemic failure) which spread to other banks and this negative spillover raised the likelihood of even more bank failures resulting in a meltdown that left everyone worse off.

Arising from the aforesaid, consumers generally reacted by taking all their money (liquidity) and banking it either under their mattresses or pooling their moneys together at a community level (.e.g. stokvels in Bulawayo) and borrow or lend money within the confines of their community members. Now, liquidity is there, but it now does not reach the banking system. It operates within communities. This explains why Zimbabwean stores are full to capacity and why Zimbabwean companies are registering disproportionately high growth, and why Zimbabwe is in the top 10 fastest growing countries in Africa notwithstanding the imaginary and fictitious liquidity shortages.

Back to the liquidity issue, in technical terms, one has to use liquidity ratios (they include current ratio, quick ratio, and the operating cashflow ratio) to determine a bank's ability to meet its short term debt obligations. In general the larger the ratio, the better is the margin of safety that that bank would meet its short term debts as they become due. A bank's ability to turn its short-term assets into cash or cash equivalent, to cover its debts is of the utmost importance in determining whether a bank lives or dies. The inverse of this being that a bank with a low coverage ratio is extremely vulnerable and can trigger a ricocheting financial crisis thereby imperilling the whole banking system. In general more people react to such events by burying their funds under their trusted non-defaulting banks (.i.e. their double beds) or investing their funds with the dreaded tsikamutandas hopping to receive some superstitious profits or illusory growth (.e.g even government officials do it , remember the presidential task force that was appointed to oversee the diesel-from-the-rock tsikamutanda).

Now, to zoom into the alleged Zimbabwean liquidity crisis, one needs to point out that Zimbabwe does not have a liquidity crisis. Zimbabweans have a lot of money but it is buried under their mattresses in Magwegwe or  Makokoba. The people simply do not trust their banking system after their hands were severely burnt during the banking crisis that left most of them with zero balances in their bank accounts. Secondly, and this is very important for people to understand, the Reserve Bank of Zimbabwe's capital reserves requirements are a death knell to the Zimbabwean banking system. Currently, Zimbabwe has the highest capital reserves requirement in Africa. The Zimbabwean banks (small as they are) need to put aside the biggest cash reserves with the Reserve Bank of Zimbabwe. This money that banks need to deposit with the RBZ is the real devil responsible for the alleged liquidity shortage in Zimbabwe.

To put this into contest, Zimbabwean banks need to put more money at the RBZ than their counterparties in South Africa, Egypt, Angola and Kenya, inter alia.  A Zimbabwean commercial Bank like CBZ or BancABC has to put aside US$100 million with the RBZ (increasing from the previous figure of US$12.5 million as at 2012). Now, this means that typically, US$100 million of such a Zimbabwean bank is not made available to its owners (the depositors) when they need it because it is gathering dust at the RBZ's vaults. Such a huge and outsized figure is a sure way of draining liquidity out of any economy in general and a weaker one like Zimbabwe in particular. So what this means is that while people are alleging that there is liquidity shortage in Zim, the cash is there but it is stashed at the RBZ. Ironically the RBZ does not lend banks anything anymore since it has no printing press. This seized US$100 million can be multiplied by  the number of banks that are affected in Zimbabwe and you will see that this adds up to over billions of liquidity. Certainly, one does not  have to be a tsikamutanda to figure this out.

It is now an established fact that the so-called Basel 2 capital adequacy requirements for banks which was prevailing during the US subprime crisis prior to the introduction of Basel 3, was partly blamed for being one of the key factors that killed many banks due to its pro-cyclicality, i.e. when a bank was under pressure and it needed urgent funds, Basel 2 required such a bank to post more capital reserves with its supervisory authorities. The simple fact being that when a bank is under pressure that is when it needs more access to its cash so as to avoid a run on itself as depositors queue outside to withdraw their money. Locking money up with the likes of RBZ merely catalyses the sudden death of a bank. Such an asymmetrical situation is repeating itself in Zimbabwe right now. Banks need money to meet their customers' demands, but the RBZ has seized their moneys in the name of reserves requirements.

To cap it all, Zimbabwe receives over a billion US$s a year from its citizens in the diaspora, with those in South Africa accounting for US$740 million  (i.e. about R7 billion). The alleged liquidity shortage comes against the backdrop of financial institutions and mobile operators coming up with more innovative ways  of assisting the diaspora to repatriate their funds with cheaper and faster means.  

In conclusion therefore it is a blatant lie and a grievous fallacy that Zimbabwe has a shortage of liquidity.

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Colls Ndlovu's professional background is in banking and finance