In financial economics, a liquidity crisis refers to an acute shortage or “drying up” of liquidity, according to Wikipedia. To all intent and purposes, that is what Zimbabweans have had to endure since the adoption of the multi-currency regime in February 2009.
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Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono has attributed the liquidity crunch to the underperformance of the major sources of liquidity and broad money supply in the economy, namely export earnings, Diaspora remittances, offshore lines of credit, foreign direct investment and portfolio investments.
To illustrate the extent to which the dearth of liquidity has troubled our financial markets, in February 2012, then Industry and Trade minister Welshman Ncube confirmed that Cabinet had spent at least two hours in one of its meetings debating the country’s liquidity situation and its impact on economic recovery.
Though the effects of the liquidity crunch on the economy are manifold, this instalment focuses on some of the many ways in which the cash squeeze has manifested itself. Increase in rental arrears
In the real estate sector, a manifestation of the liquidity crunch has seen an increase in the number of businesses vacating central business district premises, downsizing or altogether closing down; leaving behind acres of unoccupied space. This has resulted in a significant increase in rental arrears, which obviously has negative implications on rental income growth. Additionally, the liquidity crunch has reared its ugly head in the sector through constrained access to lines of credit. Decline in domestic tourism revenue
Liquidity challenges were, during the 2012 festive season, blamed for forcing local tourists at holiday resorts such as Victoria Falls to cut back on activities in order to manage their expenses. The unavailability of cash meant some domestic tourists spent fewer nights at holiday resorts compared to prior years, attributing this to negative financial circumstances. At the time, Hospitality Association of Zimbabwe president Tich Hwingwiri acknowledged that while hotels were 100% full in terms of room occupancy, the numbers did not correspond or translate into figures for participation in a variety of other recreational activities.
Slow down in property transfers
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According to a report by local research firm Platinum Groupe, the transfer of properties on the Zimbabwean market declined by 51% between July 2012 and September 2012; with the decline more pronounced in high value properties. Experts said this reflected a liquidity-starved market in which buyers struggled to fund property market acquisitions, especially on the high end of the market, with negative implications on the sector’s scope for capital gains.
Low bond uptake
The prevailing liquidity crisis has had the undesirable effect of lowering uptake of bonds such as the infrastructure development bonds issued by Infrastructure Development Bank of Zimbabwe in late 2012 for instance, which raised $17,8 million out of a possible $30 million — which translates to a subscription rate of 59,41%. The RBZ’s Treasury Bill issues also suffered the same fate of sub-optimal support. High non-performing loans/credit default
One of the major outcomes of an illiquid market has been the high incidence of non-performing loans, officially acknowleged to be in the region of 15%, but thought to be much higher. Ironically, this creates more liquidity constraints for banks, feeding a notorious vicious cycle of cause and effect. In quite a number of cases, customers have maintained a façade of servicing loans by paying only interest. This, coupled with the short-term nature of the liabilities (deposits) with which banks have funded loans and the non-payment of the outstanding capital amounts, has in turn created a debilitating liquidity crisis across the banking sector.
Constrained agricultural production
While the cotton sector boasts of arguably one of the most robust legal frameworks in the form of Statutory Instrument 142 of 2009, from a funding perspective, it is emblematic of the financing challenges of the broader agricultural sector. Aico Africa Limited chief executive officer Patrick Devenish recently confirmed that the cotton industry had been badly affected by liquidity constraints. Zimbabwe achieved peak cotton production of 353 000 tonnes in 2000, but output for 2013 was projected at a mere 145 000 tonnes.
