Latest News Editor's Choice


Opinion / Columnist

Liquidity shortage in Zimbabwe is an insane figment of imagination

10 Feb 2014 at 08:19hrs | Views
Those gullible and credulous among Zimbabwe's so-called experts who have long labored under the grievous misconception that there is liquidity shortage within Zimbabwe's financial system have been dealt a somewhat fatal blow by the ongoing revelations that top executives in the country's organisations (both private and public) are earning higher salaries than the US president.

The emerging picture shows a pervasive culture that has been closely guarded through collusive circumvention of ethics and corporate governance by a rare confluence of interests by top executives in the private and public sector.

This near-criminal unethical behavior bordering on corporate malfeasance was achieved through the creation of an illusion or hoax to the effect that there is liquidity shortage in Zimbabwe as a way of holding the country to financial ransom and reducing the populace to abject poverty and diminished living standards. As it turns out, the proverbial cat has been inadvertently let out of the bag. The fat is in the fire. Now the country needs to get to where the dog is buried.

As this writer has vigorously argued before, Zimbabwe's alleged liquidity shortage is an insane figment of analysts' imaginations. A cursory look at the facts shows that a combination of deliberate actions by those entrusted with authority (.e.g. company directors, CEOs, MDs, and monetary authorities) serve as an adumbration of the real causes of the alleged liquidity shortage. By way of a background, 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. If anything, it destroyed their livelihoods, pushing their standards of living way below the so-called poverty datum line.

This brings us back to the question of what exactly is this liquidity monster then?. How true is this alleged shortage of liquidity? In general, the role of a responsible and functioning monetary authority 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 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 Zimbabwe during the dog-eat-dog years leading up to the introduction of the multicurrency system in 2009).

From the foregoing, it is crystal clear that prior to the introduction of the multicurrency system, 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 financial institutions. 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, and, fast forwarding the scenario to now, 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) where members of the community make inter-personal loans among themselves. Now, liquidity is there, but it does not reach the banking system. It operates within communities. This explains why Zimbabwean stores are full to capacity, and, why the country is experiencing deflation.

Deflation within the Zim context is caused, inter alia, by the fierce competition whether in the transport sector or in the provisioning of goods and services. To cap it all, the depreciation of the SA Rand also causes prices to go down by virtue of the fact that Zimbabwean goods are priced in US$s , hence it is cheaper for Zim companies to buy Rand denominated goods from South Africa because they simply have to convert fewer US$s to order the same quantity of goods.

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 where there is uncertainty about banks health, people would rather give their money to some tsikamutanda hopping to receive some superstitious returns or profits.

Now, to zoom into the alleged Zimbabwean liquidity crisis, the jury is still out as to whether or not the country has a liquidity shortage. Zimbabweans have a lot of money but it is buried under their mattresses as highlighted above. 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 central bank'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) are forced by regulatory authorities to put aside the biggest cash reserves with the central bank. This money that banks are forced by regulatory authorities to deposit with the central bank is the other real devil responsible for the alleged liquidity shortage in Zimbabwe. On this issue, it is worth mentioning that the RBZ has conveniently postponed the effective date of these ridiculous reserves requirements to 2020 on the back of vigorous criticism. Unfortunately, postponement does not remove or eliminate the risk of default by these banks in the eyes of depositors.

To put this into context, Zimbabwean banks need to deposit more money, as a regulatory requirement, with the country's central bank than their counterparties in South Africa, Egypt, Angola and Kenya, inter alia. A Zimbabwean bank like CBZ or BancABC has to put aside US$100 million with the central bank (a dramatic increase 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 ordinarily available to its depositors whenever they need it because it is gathering dust at the central bank'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 Zimbabwe, the cash is there, but it is stashed at the central bank's vaults. Ironically the central bank does not lend banks anything anymore since it has no printing press. This amount of US$100 million that each bank has to deposit with the central bank can be multiplied by the number of banks that are affected in Zimbabwe and you will see that this adds up to billions of liquidity. Certainly, one does not have to be a prophet 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, its creditors also added fuel by requiring such a bank to post more collateral for its debts.

The simple fact being that when a bank is under pressure, that is when it needs access to its cash so as to avoid a run on itself as depositors queue outside to withdraw their money. Locking such a bank's money (US$100 million) with the central bank merely catalyses the sudden death of that very bank. Such a situation is repeating itself in Zimbabwe right now. Banks need money to meet their customers' demands, but the central bank has seized their moneys in the name of reserves requirements.

To cap it all, Zimbabwe receives over a US$2 billion a year from its citizens in the diaspora, with those in South Africa accounting for at least US$1 billion (i.e. about R11 billion). The alleged liquidity shortage comes against the backdrop of financial institutions and mobile operators coming up with even 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. Go and tell the likes of Cuthbert Dube and Happison Muchechetere, among others, that that there is liquidity shortage, they will refer you to a psychiatric ward at Mpilo Hospital or better still, at Ngutsheni where your allegation could get better reception.

-------------
Colls Ndlovu is an independent financial analyst and writes in his personal capacity.


Source - Colls Ndlovu
All articles and letters published on Bulawayo24 have been independently written by members of Bulawayo24's community. The views of users published on Bulawayo24 are therefore their own and do not necessarily represent the views of Bulawayo24. Bulawayo24 editors also reserve the right to edit or delete any and all comments received.