IN the wake of the financial sector’s recent challenges in meeting demand for cash, there is need to ensure that actions of the transacting public are better informed. This is because there are perceived and actual shortages of cash and a line must be drawn where one ends and the other begins.
BY Omen Muza
For instance, is the liquidity crisis the same thing as the cash crisis? Of course, the two are different, but it’s easy to confuse them because in many respects, they have the same causes and effects.
Loosely speaking — and without resorting to jargon — a liquidity crisis is the economy’s state of not having adequate levels of money in circulation, which affects banks’ ability to carry out their intermediation role of mobilising deposits from surplus units of the economy and allocating it to deficit units.
To illustrate the difference between a liquidity crisis and a cash crisis — a tobacco farmer who is unable to withdraw the credit balance in his account is by no means facing a liquidity crisis, but a cash crisis.
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Likewise, the bank which has a healthy credit balance in its RTGS account, but is unable to use it to import cash due to an inefficient process of funding the nostro account cannot really be said to be suffering from a liquidity crisis.
These days however, it is not uncommon for an argument to start by purporting to discuss the cash shortages, but end by veering into prescribing solutions for the liquidity crisis. To make a further distinction, in my view the effects of the liquidity crisis are likely to be felt more directly at company or corporate level, while the cash crisis manifests itself more readily at personal/individual or household level.
Additionally, the liquidity crisis is something we have lived with for perhaps four or five years, as a reflection of the slowdown in economic growth, while cash shortages have previously tended to be seasonal, but not endemic — in line with fluctuations in transactional demand for cash in the economy. This instalment outlines, in my view, the causes of the liquidity and cash crises. The liquidity crisis ●High import bill vs low export capacity: As a country, we currently import more than we export, so there is net outflow of foreign currency — in other words the country is a net exporter of liquidity. In the first quarter of 2016, Zimbabwe imported goods worth $1,32 billion and exported $625,96 million worth of merchandise.
●Inadequate FDI: Foreign Direct Investment (FDI) would ordinarily be one of the main sources of liquidity for the country, but at slightly over $500 million, it cannot be expected to make a meaningful impact.
●Low domestic productivity means less turnover for businesses and in turn lower tax revenue for a government which already consumes over 90% of its revenues, meaning that not much is going into investment to improve this productivity. Resultantly government is unable to meet its obligations when they fall due, which in turn affects its own private-sector creditors domino-style.
●Restricted access to lines of credit: The country is unable to access affordable long-term lines of credit due to its debt burden and perceived high country-risk profile, factors which naturally compound the current liquidity woes.
●Falling commodity prices: Mining is a major contributor to the country’s export earnings and Zimbabwe still relies significantly on export of primary commodities. Against this background, the precipitous fall in commodity prices attributed mainly to reduced Chinese appetite has a significant adverse impact on the country’s export revenues and ultimately its liquidity position.
●Illicit financial flows: In the recently announced Monetary Policy Statement, the Reserve Bank identified illicit financial flows as one of the causes of the country’s adverse liquidity situation. I, however, think they did not sufficiently explain this phenomenon before reverting to control measures which may actually worsen the situation.
The cash crisis ●Inability to print cash: Under the multi-currency regime, the Reserve Bank of Zimbabwe (RBZ) cannot print cash in response to demand dynamics. Although the apex bank can supply bond coins, this can only happen up to a limit of $50 million, the value of the bonds issued to back the coins.
Though some argue that the RBZ is printing cash thorough issuance of TBs, the treasury instruments do not immediately represent a real monetary inflow. They are in fact fingered as one of the causes of the current liquidity crisis, since they can amount to an immediate monetary claim that is not backed by a corresponding injection of liquidity into the system.
●Structural bottlenecks: Banks are unable to import cash timeously due to depleted nostros which the Reserve Bank of Zimbabwe cannot fund quickly enough from the RTGS accounts it maintains for banks. Banks can only keep 10% of their total deposits in Nostro accounts and with limited inflows from exports this has proved inadequate to cover import payments and cash imports.
●Increased demand for cash: The shortages of cash have been partly attributed to increased demand for cash due to monthly civil servants’ salaries and delayed bonus payments, payment of tobacco farmers under the new system and payment of small scale/artisanal gold miners among other transactional needs.
Outside these legitimate demands for cash, the public’s increasing quest to hold cash could be a sign of falling confidence in the banking sector — we should not be seeing rising demand for cash when liquidity is falling. The RBZ and banks say they have imported $263 million worth of cash in the first quarter of the year, which should be enough to meet the market’s needs.
●Sub-optimal usage of plastic money: The reluctance of Zimbabweans to use plastic money is considered one of the contributory factors to the current cash shortages. However, users have genuine concerns which limit card usage such as high transacting costs and poor connectivity and these must be addressed.
●Self-fulfilling prophesy: The media, through no fault of its own, has in no small part contributed to the demand for cash by amplifying the anxiety of the banking public through recent headlines.
In the end, cash shortages become a self-fulfilling prophecy, as customers rush to withdraw their money in case they may not be able to do so in the near future.
Omen edits the MFSB. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8 or initiate contact through omen.muza@gmail.com