Cash crisis stalls economy

Kudzanai Gerede
THE current cash shortages within the financial services sector has had grave ramifications in all spheres of the economy which has further tightened liquidity, slowing down business activity as consumer power has been heavily compromised.

Local banks have had to lower their daily withdrawal limits for both individuals and corporate, to an average off $ 500 from $8000 for individuals. Most local banks have since suspended their automated teller machines with a few still operational having also capped withdrawal limits.

The Reserve Bank of Zimbabwe has recently injected a total of $145 million to avert the cash shortages during the past three months and an additional of $ 118 has been imported by local banks and yet the situation remains unpalatable.

Recently the RBZ embarked on a financial inclusion exercise for tobacco farmers to open bank accounts to access their money through banks and ATMs. This has also put pressure on the local banks who are already struggling to cope with cash demand for civil servants bonuses.

Recently RBZ Governor, Dr John Mangudya, noted that despite these efforts to mitigate the cash crisis in the financial sector, the cash injected has not circulated in the economy as anticipated. He attributed the unintended precedence not only on the generality of unbanked Zimbabwean, but also bemoaned the corporate world’s attitude of shunning the banking sector as the major albatross to smooth flowing of cash.

Analysts say this is a result of poor public confidence with the local banks which emanated in the Zimbabwean dollar era when hoards of banked Zimbabweans lost huge amounts of savings they had stocked for years.

It is the corporate world which holds the bulk of the country’s cash and yet they keep huge volumes of money in safes. Analysts have however highlighted the critical role the burgeoning informal sector has played in usurping the vast amounts of cash in the economy.

According to the Ministry of Small to Medium Enterprises, there is around $7 billion circulating in the informal sector although the Central Bank argues that $3.4 billion is in the informal economy, there is, however, consensus in principle that the informal sector in a critical pillar with massive cash in its circulation.

However, worryingly is the fact that a recent survey by Finscope 2015, it showed that of the total SMEs only 15 percent are formal, which shows how much the financial sector is losing due to huge numbers of unbanked SMEs.

However, the current financial stalemate has been looming ever since liquidity challenges started being felt. The cash shortage has hit business the most as demand is dwindling due to weak consumer power.

This has been more evident in the crumbling of the country’s stocks. The Zimbabwe Stock Exchange (ZSE) has seen its market capitalization contracting by 14 percent to $2.6 billion in the first quarter this year from $3.1 billion in December last year as a result of poor performance in the local economy owing to poor liquidity.

Market capitalisation reached its zenith of $6 billion in July 2013 since the introduction of the multi-currency regime in 2009.

This sudden waning of stocks is a manifestation of key economic fundamentals within the economy which have seen inflation going in the negative as there is little cash in circulation.

This has seen some sections of economic pundits arguing that internal devaluation be adopted which entails adjusting downward nominal wages so as to close the competitiveness gap.

“Doing business is very difficult with the current cash crisis when there is no money to transact. The situation is thwarting confidence in the banking sector because those who are banked are not guaranteed to get their money at the end of the day, so it further makes people shun banks,” noted economist, Mr Christopher Mugaga.

“The cash crisis is leaving a negative bearing on business. Due to the scarcity of cash, banks are now inclined to raise bank charges and interest rates are increasing. This is not a good precedence as this will further hamper our chances of local industry competitiveness when cost of borrowing becomes high,” he added.

He further said there should be mechanism set in place to incentivise banking currently as it is public knowledge that some businesses and people have the money stocked in their homes. Most banks are charging exorbitant depositor charges which were detrimental to any thought of banking in the country.

Mr Mugaga, however, said the solution to end the cash crisis and liquidity challenges the country was facing was for the country to become productive once again.

“We need to produce and sell that’s the short of it all. Producing will mean that we have a lot to export and get the required foreign currency into the economy,” he said.

Zimbabwe currently have a negative trade deficit of over $3 billion which means it was consuming more than it was producing and exporting billions of dollars on consumables that could be produced locally.