17 August 2014

Zimbabwe: Liquidity Crunch Exaggerated - RBZ Advisor

Photo: PPS
Mbare Market, Harare, Zimbabwe.

Economist Brains Muchemwa says the liquidity crunch gripping Zimbabwe could be a challenge, but is largely an exaggerated creation of a crisis by "those companies and individuals that have recklessly piled up debt on their balance sheets and failed to turn around their business models".

Muchemwa sits on the Reserve Bank of Zimbabwe monetary policy committee and chairs the Macro-economic committee of the Zimbabwe National Chamber of Commerce. He is also a director of a Micro Finance institution called Oxlink Capital.

Muchemwa said there was abundant evidence that in the general economy, wide liquidity has been improving, with broad money supply ballooning from US$475 million in April 2009 to US$4, 09 billion currently.

Consequently, the annual cost of credit had come down from around 120% in 2009 to around 20% now, he said.

"It is important therefore to separate poor business models from the liquidity crunch scapegoat," Muchemwa said. "Most of the big corporates that gobbled debts with reckless abandon have not only poked holes on bank balance sheets, but have equally destroyed even the SMEs [small to medium enterprises] by piling up creditors and failing to honour their obligations. The recent upsurge in schemes of creditors bears testimony to this," Muchemwa said.

He said fears of an economic crisis were exaggerated as going forward the creative destructive mechanism of the economy was going to re-organise the market, with inefficient and imprudent companies collapsing and being replaced by new and more efficient ones.

"Equally, other factors of production such as labour will self-correct to reflect on the scarcity of jobs and the ability of the economic activities to reward different levels of skills and effort," Muchemwa said.

But a majority of economic analysts, businesspeople, politicians and the ordinary Zimbabwean at large see the matter differently.

Last week, during the Zanu PF women's conference, economic and political analysts said the ruling Zanu PF was likely to be deeply engrossed in political fights for national leadership until well after year-end at the expense of the economy, setting the country up for a gloomy festive season.

Government has failed to stem the prevailing debilitating liquidity constraints as politicians remain engrossed in fights ahead of the December Zanu PF elective congress.

The liquidity crunch has manifested itself in companies failing to pay for services rendered to the extent that the majority of workers in the country are getting their salaries reduced or withdrawn altogether while hundreds are losing jobs every week. The few remaining companies have also been reduced to barter trading as liquid cash becomes a very scarce commodity.

"We are destined for a gloomy Christmas," an economist said adding, "it is a bad season to address the economy issues as the ruling Zanu PF has its priorities elsewhere".

"What happens between now and December will show whether or not there is hope for the economy."

Analysts say the liquidity crunch was like a cycle which had to be broken.

"It's like a spiral which has to be stopped at some point. People are not spending because they have no money as they are not working. They are not working because there are no jobs. There are no jobs because companies are shutting down. There has to be a deliberate intervention at the liquidity side or production to break the cycle," an analyst with a stockbroking firm said.

At the liquidity side, the analyst said, government could pump in money through printing to break that cycle. This task was not practical under a multicurrency regime as the central bank did not have the ability to print money.

"Government has to promote production for exports and this is not costly as it needs right policies and signals," the analyst said.

"This is where our hope lies. If industry starts producing competitively, we will be able to break that cycle. Government should create the right environment and business will invest. The reason why businesspeople are in business is because they want to make a profit."

Zimbabwe has been failing to generate enough exports to improve on the balance of trade, leaving the country in a situation where very few exports must support an insurmountable volume of imports.

The inability to generate more for exports has been a blow to the manufacturing sector currently operating at 39% capacity utilisation.

The influx of imports means that the little money generated locally is shipped out.

Government has no budgetary support and has to look for money for day-to-day operations. Lines of credit into the economy are hard to come by due to the country's perceived risk profile. Foreign direct investment is not coming as investors are wary with the repressive and confusing empowerment legislation coupled with inconsistent policies.

"Exports revenue is the fuel that propels the jet into the sky. If you take the jet up without enough fuel, it will crash," an economist with a leading commercial bank said.

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