Cash crisis: Zimbabwe’s unavoidable truth

This directive is in line with an announcement made by the central bank on May 5 that it would convert 40% of all bank deposits resulting from exports to rand, and a further 10% to euros, in a bid to restore “balance” to the multicurrency basket and ease a chronic dollar shortage in the country.

According to the report obtained by Bloomberg, the regulator will transfer the equivalent amount into the authorised dealer’s account for the exporter, while an “incentive” equal to 5% of the proceeds will be credited to another account set up on behalf of the exporting company. This was billed as an “incentive payment” aimed at “encouraging companies to export their products”.

In reality, it was an attempt to get banks and currency dealers to abide by new exchange-control regulations that force exporters to accept payment in rand and euros. I say this because the bank followed up its directive with a warning that it would cancel the licences of banks and foreign-currency dealers if they violated the new regulations. From what I can ascertain, there was no mention of the 5% sweetener when the regulations were first announced.

This announcement was first made in May along with a host of measures including the introduction of bond notes, which are intended to boost liquidity. These will supposedly be equal in value to the dollar and backed by a $200m loan facility from the Cairo-based African Export Import Bank.

Zimbabwe already has “bond” coins that were introduced by the government to provide loose change to Zimbabweans, who were rounding off prices to the next dollar, but many are concerned that these bonded notes are a way to reintroduce the Zimbabwean dollar through the back door. Not surprisingly, the announcement led to Zimbabweans rushing to withdraw their hard-earned money, making the cash crunch worse.

Zimbabwe adopted the US dollar in 2009 as part of a multicurrency system that also included the rand, euro and yuan, but its success has been limited.

Although bank deposits grew tenfold following the introduction of the multicurrency system, money supply growth slowed and liquidity conditions became tight as deteriorating economic conditions forced the country to import more than it exports.

Since 2005, Zimbabwe’s trade deficit has widened from an average of $400m to $2.5bn. In 2015, the country imported $5.5bn of goods, but only exported $2.5bn. The result of running such a large trade deficit for so many years is that the country is running out of paper money. A bad situation has been made worse by falling commodity prices, weather conditions and infrastructural hurdles such as disruptions to the supply of water and electricity, which have all but put an end to the manufacturing sector. This liquidity crisis has been worsened by the rand’s depreciation against the dollar.

According to Finance Minister Patrick Chinamasa, the dollar accounted for 60% of the currency in circulation in 2013, while the rand made up the other 40%. Since then the number of rand being circulated has declined rapidly as anxious Zimbabweans have swapped out of rand and into dollars, which they rightly perceive as a better store of value.

In response to the cash shortage, the central bank announced that daily withdrawals would be reduced from $10,000 a day in January to a maximum of $1,000, €1,000 and R20,000, as well as placing a limit on the amount of forex importers are able to take out of the country.

The country is so short of foreign currency that the central bank also introduced regulations that triage who the banks are allowed to make foreign currency payments to. Top of the list are imports of goods such as basic foodstuffs and medicines, fuel and agrichemicals. Next in line are those the government deems to be involved in the productive sector, such as mining and manufacturing. Other payments such as capital remittances from the sale of local property or payment of foreign universities are categorised as nonpriority items and are unlikely to get approval.

As Confederation of Zimbabwe Industries president Busisa Moyo has pointed out, the new notes might relieve the cash shortage, but they won’t address the cause of the crisis, which is that the collapse of the economy means the country imports the bulk of what it consumes and produces precious little for export. The unavoidable truth is that Zimbabwe needs to generate foreign currency and forcing exporters to take a 50% haircut, even if you then offer them a 5% “incentive”, isn’t going to do it.

There are, however, measures that could be taken to restore confidence in the economy, but they would probably require a complete overhaul of the government. The first is to re-establish property rights and reintroduce the rule of law. By enabling and protecting property rights, domestic and foreign investment would slowly return and growth would follow.

The next step is to reduce government regulation and privatise large swathes of the economy. Ironically, in a situation in which the government has followed a policy of nationalisation and exhausted all possible sources of government revenue, wholesale privatisation is the only solution. This will initially be painful, but things can’t get much worse for government employees, many of whom have gone unpaid for months.

Lowering the state wage bill and increasing the amount spent on investment would also help, although I would be wary of almost all spending that would require incurring additional debt — even if it was for infrastructural spending that under normal circumstances would be considered necessary.

Sadly, even in a best-case scenario where all of these measures are introduced, the fortunes of the Zimbabwean economy and its people will remain largely at the mercy of global economic conditions. Because of the almost complete destruction of manufacturing, the lack of foreign reserves and distrust in government, Zimbabwe’s economy will remain resource-driven and dependent on foreign capital for the foreseeable future.

This article was originally published by South Africa’s Business Day.