8 August 2017

Zimbabwe: Cash Shortages or Forex Crisis?


Reserve Bank of Zimbabwe governor John Mangudya on Wednesday concluded his monetary policy statement review appealing to Zimbabweans to change the cash crisis narrative to foreign exchange shortages.

This change of narrative, Mangudya argued, is essential to focus on foreign exchange as the critical missing factor of production which needs policy interventions to rebalance the economy. "Reducing the challenges facing the economy to a symptom of cash shortages is negating the fundamental structural and indiscipline challenges facing the economy and gives a wrong impression that cash shortages are caused by banks and the (RBZ)," he said.

"Changing the narrative to foreign exchange shortages therefore brings out the correct position that the economy is not producing and exporting enough to meet its requirements and that the shortage of forex is exacerbated by market indiscipline."

While Mangudya's plea appears sensible in a country in deep economic and fiscal crisis, semantics and changing of narratives -- not even mindset and policy shift -- will not help anything.

Zimbabwe needs to change path, from that of extended leadership and policy failures to one of good governance and viable policies. It needs progressive politics and a viable economic model. It's not about the cash crisis and foreign exchange shortages narratives.

Everybody knows the current liquidity crunch and cash crisis are a manifestation of a deeper structural problem rather than the cause. Symptoms of a disease are not the same as the causes. That is elementary. Due to poor governance and bad policies, the economy is grappling with company closures, job losses, low foreign direct investment inflows, falling production, declining exports, collapsing business activity and hence poor forex receipts, among other things.

Since Zimbabwe is using other countries' currencies after printing its own out of existence, it has no monetary sovereignty and quantitative easing options. In fact, it has no monetary policy tools to influence the economy. So with limited access to foreign inflows, the ensuing fiscal imbalances have become unsustainable, and are being financed by rising domestic borrowing. The expansionary fiscal stance, curtailed net capital flows, and declining investor confidence have resulted in cash shortages. No one has ever said banks are causing cash shortages. So it's not an issue. In reaction to this, government has introduced capital and current account controls and quasi-currency instruments -- particularly the bond notes -- in the multicurrency-driven economy. An overvalued real exchange rate is hurting external competitiveness. Budgetary operations are crowding out the private sector, and the expenditure profile tilted towards employment costs and unsustainable agricultural support -- the command agriculture model -- is inhibiting capital and social expenditures.

On the financial side, credit to the private sector remains subdued, and some domestic banks face increasing risks emanating from fiscal imbalances. What is needed urgently are reforms, improving the business climate and re-engagement with the international community, not just a mere change of narrative. We are certain Mangudya would commonsensically agree on this.


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