The happenings on the economic
front in Zimbabwe are reminiscent of horror movie scenes. Every other policy or
public official announcement on key aspects, save for inflation figures, points
towards more disaster. The government revenue collection figures are very
disappointing and having been missing its revenue targets by about $30 million
every month this year, the government is fast running broke. On the back of
unemployable expenditure reduction and switching alternatives to manage our
huge appetite for imports, the trade figures show that the negative balance of
payment position is shooting through the roof and unless the figures are
incorrect, and indeed they could be, managing liquidity and creating jobs will
remain problematic for a long time.
Statistics
from the banks are revealing household indebtedness that is rising at alarming
pace! And worse, even nature doesn’t seem to sympathise as below average
rainfall is forecast for the 2-012/2013 agricultural season. The biggest of all,
the liquidity crunch, does not seem to be ameliorating and has reached worrying
levels. It is now being blamed for everything wrong in the economy, just like
the shortage of foreign currency, price controls and high inflation were the
scapegoats for everything wrong prior to dollarisation in 2009. If Zimbabweans
were like the Greek that have taken full time jobs in street strikes and
demonstration against austerity measures being undertaken by its government, by
now we would have been fed up of demonstrations against the liquidity crunch.
Save for a few giants in mining
such as the diamond, platinum and gold mines, and a handful of companies
focusing on fast moving consumer goods and services such as Delta, Innscor and
Econet and a few isolated others, the liquidity crunch has had its fair share
in battering the economy into bad shape and signs of worse things to come are
there for everyone to see. The mid-year results from the banking sector, which
are generally the barometer to gauge the healthy state of the economy, are far
less impressive and reveal a troubled economy underneath that needs more
collective efforts from policy makers and politicians than before to steer it
into the right direction.
But sustaining the argument that
the liquidity crunch is the cause of most the challenges facing the economy is
very flawed, at least from a fundamental perspective. Rather, it is important
to note that the liquidity crunch is a product of largely bad decisions by
economic agents that have been draining away the massive liquidity flowing into
the economy since dollarisation. There
is abundant evidence to prove that the overall nominal liquidity position in
the economy has been improving significantly since dollarisation and the
structural economy-wide rigidities that make the liquidity untenable needs more
of policy coherence and meeting of minds among the policy makers and
politicians than focusing solely on liquidity as if it’s the most important
economic variable.
The growth in broad monetary
aggregates, a good proxy in measuring the general liquidity position, has been
impressive since dollarisation in 2009. Banking deposits, which stood at $475
million in April 2009, leapt to a billion dollars six month later in October of
the same year. By December of 2010, deposits stood at $2.5 billion and
presently there are estimated around $4 billion. An informed conclusion would
therefore concede that broad money supply, and indeed private sector credit expansion,
have been skyrocketing at a break-neck
speed.
Another indicator that can shed
more light on the directional aspect of the economy-wide liquidity position is
the cost and structure of credit in our market. In line with the massive growth
in the quantum of liquidity in Zimbabwe since 2009 and rising loan-to deposit
ratios, the cost of credit has been coming down sharply, from the highs of over
100% per annum just after dollarisation to the current rates of around 25% per
annum. Equally, from a structure perspective, the tenors of credit facilities
being offered in the mainstream financial services sector has improved markedly
from just 3 months, which was the norm in 2000-2010, to around 1 year in best
case scenarios presently, and indeed much better for mortgages finance. All
these aspects clearly buttress the notion that the liquidity position in the
economy, by and large, has been improving markedly.
On the other hand, evaluating the
behavioural aspects of the lenders and borrowers can equally give a good
picture on the status and transition of the economy’s overall liquidity
position. An economy that is enjoying considerable amounts of fair and easy
flowing liquidity is usually characterised of banks lending expansively, whilst
borrowers, because of the existence of easy credit, pile up loans quickly and
unreasonably. The US sub-prime mortgage market crisis of 2008 has its root
problems from this phenomenon. It is much easier to draw a casual link of
similar nature in Zimbabwe.
The increasing monetary aggregates since 2009
tempted and indeed misled both lenders and borrowers that the ‘good times would
roll forever’. The resultant increasing bank loan-to-deposit ratios, which leapt
from 33% in April 2009 to a peak of 87% in December 2011, provide evidence of the
lending over-drive by lenders and on the other side, the speedy gearing or
indebtedness on part of the borrowers. This reason behind this is quite easy to
comprehend though. The abrupt dollarisation of the economy in February of 2009 wiped
all the working capital of domestic companies and the need to borrow became so
urgent and the only way to survive was through borrowing not only to produce,
but equally to pay wages and salaries as the companies had lost everything to
inflation, save for physical capital. Yes, the massive gearing of balance
sheets by companies was for a noble cause since the dollarisation, without
international support, created havoc and indeed the banks need to be applauded
for having been lending generously. But, still, not sufficient restraint was
employed by the borrowers and lenders.
Therefore the liquidity crunch
which has been building up in the economy is in actual fact, emanating from the
reality that the many borrowers have lost money on their balance sheets and
cannot repay the banks to enable continuos flow of credit in the economy. The
problem, as has been explained before, is easily traced to the avalanche of
liquidity flowing through the economy since 2009 which, unfortunately,
intoxicated weak business models via loans they accessed from banks. The
swelling liquidity rivers of life that borrowers jostled to drink from have
unfortunately turned to become the same rivers that devour most of those that
recklessly drank from them. And the messengers of court and deputy sheriff, who
are the undertakers and executors of estates of those that get intoxicated by
drinking from these assumed rivers of life, have been very busy. Indeed if
these were a business to be listed, the share prices and certainly the dividend
payouts would not disappoint for the next three years or so!
Policy makers have attempted to
intervene in the crisis. There has been talk of ZETREF and DIMAF funds to
improve liquidity and revive financially distressed companies. Inasmuch as it
is a good policy to ease pressure off the balance sheets of these distressed
companies by pumping cheap and long term money into these weak balance sheets,
the fact that the funds are targeting financially distressed companies means
that the money is most likely to be lost. One of the most plausible
consequences of this intervention is that the companies that will access these
loans will simply re-finance their existing loans and at the best case, remain
in their current situation awaiting bankruptcy. And for a broke government that
is battling to balance key emotive day-to-day survival priorities with such economic
interventions, the execution of such decisions will be slow and very painful,
if at all they live to be executed.
The foregoing analysis clearly
points out that the fundamentals of our economy are quite bad and it is
difficult to ascertain the amounts of liquidity that would need to be pumped
into this economy until it starts to tick sustainably. Most of the business
models that companies are running on are beyond their sale-by date and no
matter how much money is pumped into their balance sheets, they will continue
to struggle. Given these many liquidity-sapping corporate dinosaurs that litter
the economic landscape and the fact that Zimbabwe is dollarised and has no
capacity to quantitatively ease the markets, the liquidity crunch is definitely
going to stay for another long, long season.
Elsewhere, quantitative easing
seems to be the only consensus in stimulating growth that has become very
elusive. US Fed announced on Thursday last week that, in the name, letter and
spirit of quantitative easing, would start pumping $40 billion monthly in the
economy buying mortgage backed securities for an indefinite period until it
starts witnessing improvements in the labour market. And interest rates would
be kept low until mid 2015!
