Liquidity crunch in Zimbabwe - the convenient scapegoat

The issue of the liquidity crunch in Zimbabwe has now taken a toll on the economy. And in many quarters, the liquidity crunch has become the convenient scapegoat for any form of poor performance and indeed the policy makers need be wary of the likely changes in demographics that will rob the economy of the future workforce as couples, on account of the liquidity crunch, might be postponing bearing children.

Recently the market has been awash with information on the performance of the economy as the financial results of listed companies and banks have been coming hard and fast for the year ended December 2013. A perusal of that section that reads “Chairman’s Statement” on almost all results published has revealed that indeed the liquidity crunch has taken a toll on most of the companies’ performances. Just before dollarisation in 2009, industry complained bitterly about the state of the economy that made it difficult produce and remain in business. And indeed it was justified. Every other company explained its poor performance on account high inflation, shortages of foreign currency and of course the government administered price controls. There was consensus among industry back then that if these could be addressed, then industry would be able to retool, employ, produce, sell at a profit and be happy forever thereafter.

Unfortunately or otherwise, dollarisation in Zimbabwe cured all these challenges in one big swoop. Now that inflation is hovering worryingly below 1%, with that much needed foreign currency now being the local currency in a liberalised pricing and import regime, surely the conditions should be the most ideal for industry to be progressive. But alas, another unforeseen challenge has cropped up and that relates to the liquidity crunch. All of a sudden, every company that is failing to deliver values is heaping the blame on the liquidity crunch. And the results of listed companies that have been recently published bear testimony to this. From the like of Meikles, Hwange, Zeco, Border Timbers to almost every other company that published results, it has become impossible to miss the word ‘liquidity’ in the preamble or explanation on why the company would not have done the best under the current circumstances.

Indeed the thinking that the liquidity crunch has created many problems for companies in Zimbabwe is not a faulty one. The liquidity crunch has seriously dented aggregate demand and the cost and access to credit has been pushed beyond the reach of many. In fact, with the bankers having burnt their fingers on non-performing loans at a time their shareholders expect them to safeguard capital, more selective approaches are being applied in the credit granting process. The annual decline in private sector credit growth from 28.77% in February 2013 to only 1.5% in February 2014 bears testimony to banks responding to the attendant risks presented by the prevailing liquidity crunch.

Elsewhere, able governments have been making frantic efforts to ensure that the banks continue to provide credit so as to sustain production and preserve jobs. The term quantitative easing (QE) has become very popular since 2008. Basically QE entails the central banks printing loads of money and stuffing it on bank balance sheets to ensure that credit continues to flow in the economy. The now popularised quantitative easing programmes that have been adopted by most of the developed countries from 2008 to date have been a direct and persistent response to ensure that the credit markets don’t cease up. The US has been pumping $85 billion monthly onto banks balance sheets by buying toxic securities and bonds from banks since the onset of the financial crisis. This massive programme has since injected a whooping $4 trillion dollars into the American economy since 2007 and this has all been in an effort to save its economy from recession. 

In Japan, after 20 years of uncomfortable deflation, prices are finally rising thanks to relentless quantitative easing efforts. Although QE received applause in the early days, opinion is now growing that the programmes have extended much longer than anticipated. The hoards of cash being pumped into these economies may soon create structural challenges relating to inflation and may even promote the same reckless behaviour among bankers that triggered the sub-prime mortgage crisis in the first place.  The IMF, seemingly undecided on the how to advise economies on the way forward with regard QE programmes, recently issued a middle of the road opinion on the US QE program in its Global Financial Stability Report.

The situation is however different for Zimbabwe. Unfortunately because of the dollarisation, the policy makers have little room, if at all, to inject liquidity into the economy to give the banks more confidence and ability to lend. Although efforts have been made and continue to be made by government to arrange bilateral and multi-lateral lines of credit for the economy, the reality remains that lines of credit are more often very specific and have stringent conditions. Resultantly, most of the lines of credit from multi-lateral institutions that have been availed to Zimbabwe banks have remain largely unutilised.

To therefore expect that this country will access significant lines of credit that will have a marked impact on the liquidity position of the economy is probably expecting too much.  Equally important is to understand that lines of credit are just loans and therefore will eventually need to be repaid at some point. However considering the state of Zimbabwe industry and the fact that most of the companies are troubled, it remains highly unlikely that these lines of credit will, like QE, ease the cost and access to credit for the needy corporates. It is therefore no surprise that most of the bilateral lines of credit that may be dangled to Zimbabwe are “Buyers Credit Schemes” as correctly captured by the ENS Economic Bureau of India on the 30^th of March 2013 in reference to the proposed $400 million line of credit from India. These bilateral credit lines will mostly benefit the offerers as they will only consider lending to Zimbabwean companies that would be buying products or services from their country.

In essence, Zimbabwe’s capital account will remain unchanged and as fragile, whilst the current account will be deteriorate further. Zimbabwe will, in such instances, therefore be a net recipient of finished goods from these offerers of lines of credit, implying therefore that the attendant liquidity challenges affecting this economy will compound further even after accessing some of these lines of credit. During this era where every country is looking at ways of preserving jobs and building up foreign exchange reserves, it would be expecting the very unusual to get significant bilateral lines of credit that would, in essence, create significant jobs in Zimbabwe and assist in the production of final goods. 

It is not surprising therefore that the likes of SA and Botswana, whose economies have benefited immensely from the economic downturn in Zimbabwe, would be the last to organise lines of credit for Zimbabwe. These countries would rather create more jobs at home, grow their incomes and export goods and services to Zimbabwe than assist the revival of Zimbabwe industries that would compete with their export-oriented companies. At the worst case, they would rather import jobs from Zimbabwe to fill up their deficit areas than help Zimbabwe industries come back onto their feet. And indeed it should not come as a surprise that the $70 million line of credit from Botswana never materialised since the signing of the MOUs in 2010, whilst the inclusive government chase for a promised R1.5 billion line of credit from SA draw blanks. And surely one cannot blame SA or Botswana. Zimbabwe would have done the same if it were in either of their positions. 

All economies are driven by the selfish desire to create and protect their citizens’ jobs whilst at the same time doing everything necessary to grow their incomes. It is for this reason that bilateral and multilateral trade negotiations have always been burning issues, the reason why up to this day there is hardly any convergence in regional and global trade protocols. It therefore doesn’t come as a surprise that Russia joined the World Trade Organisation on 22 August 2012. Considering the foregoing analysis on the motivations around bilateral lines of credit, the thinking and expectation among Zimbabweans that significant lines of credit will, at one point, be secured to address the liquidity challenges is therefore erroneous.

And with this full information that the liquidity situation is less likely to improve anytime soon, to see companies continue mourning about the liquidity challenges is really sad. What is important is to understand that the liquidity crunch is a culmination of the sum actions of mostly the big corporates that borrowed money from the banks and failed to repay. A cursory look at most of these same corporates that are blaming the liquidity crunch for their misfortunes reveals that indeed they are sitting on huge bank loans they are struggling to repay in one way or another. A number of the failed institutions have so far gone down the drain with bank loans, in the process taking liquidity with them to the grave. The recently collapsed banks, on the other hand, have met their fate on account of non-performing loans, be they to insiders or otherwise. It is inconceivable how this economy, without the reserve requirement to restrain broad money supply growth in the face of high loan-to-deposit ratio and high interest rates, would experience a liquidity crunch of the magnitude being felt. Its is therefore clear that the private sector in Zimbabwe, on account of it having sucked $3,7 billion in loans from the banking sector and generally struggling to repay a significant proportions of these loans after having gambled in funding unsustainable business models, has been the major culprit in creating the liquidity challenges in this country.

Not only have some of the reckless big corporates sunk with banks money,  they have equally sunk with other creditors’ monies and the ripple effect on the economy-wide liquidity situation has been much wider than previously estimated. The likes of the big guns of yester-year such as Star Africa Corporation, PG, CAPS, Gulliver and so on have not only drained liquidity out of the banking sector, but have equally created serious challenges for their creditors and dragged them into the mud. It is reported that PG owed creditors about $16.3 million on 30 September 2013 and surely with such reckless abandon among the big corporates, the country’s liquidity position cannot be expected to remain favourable. Equally, the likes of Border Timbers, which ramped up its borrowings from $4.7 million in 2010 to $16.97 million in June 2013 at a time when its debt service coverage ratio was only 33%, depicts a worrying trend of how big corporates have been plunging into more unsustainable debt and in the processes compounding the economy-wide liquidity crunch. Whilst indeed it is very true that the liquidity crunch has been affecting the performance of the economy and in particular industry, it is important to understand that unless industry changes its mentality, the few inflows of fresh liquidity coming into the economy will continue to go to waste and the position will not improve anytime soon, creating a vicious cycle centred on convenient scapegoats.