eBusiness Weekly
Taurai Togarepi
The country has been suffocating from cash challenges for the past few months resulting in many theories being put forward in trying to address this anomaly. There have been calls to adopt the rand, print more bond notes and introducing local currency. The President and the Reserve Bank of Zimbabwe governor have given an indication on the need to introduce our own currency when fundamentals are right in order to preserve its value.
As a way of background, it is imperative to mention that the major cause of the cash challenges is the ballooning in electronic money balances emanating from the issuance of Treasury Bills and running an overdraft with the Central Bank to finance the budget deficit.
Export receipts have been increasing over the last few years though at slower pace compared to the rate at which imports have been increasing as shown on the graph below.
What this illustrate is that, the death in the country’s manufacturing sector is responsible for huge increase in imports as households and firms resorted to imports. Hence addressing this forms part of the solution in fixing the cash challenges.
Given the extent of the challenges prevailing in the economy, it is very difficult to prescribe a short-term strategy or policy to address this anomaly. There is need to address the fiscal imbalance so as to narrow the gap between electronic money balances and hard currency circulating in the economy.
The Minister of Finance promised to narrow the budget deficit in 2018.
Realistically, this could be difficult to achieve in 2018 due to a lot of pressure especially from the need to import maize to supplement reserves that were built in 2017 as this year’s crop suffered from moisture stress.
The country’s reserves are very low, only enough to cover three weeks’ worth of imports. There is need to build enough reserves to back the new currency.
Reserves are critical as they give the central bank more flexibility and resilience in volatile market conditions. This normally helps when a currency crashes or devalues and the central bank may use the more valued currency to temporarily balance the loss and hence withstand markets shocks.
The country also needs to get huge injections in the form of donor funding or cash portfolio investment. This will help to improve liquidity in the form of cash as opposed to other liquid assets such as TBs. Foreign direct investment is also critical but normally its benefits filter in the economy in the long run as this normally involves machinery, technology etc.
Those calling for more bond notes may argue that the velocity of circulation is slower when using cash as compared to electronic money.
This may be true but it is critical to understand that, the same bond notes are not being deposited back into the formal system due to low confidence in the banking sector. Most depositors are failing to get their money as and when they need it.
They are being limited to as little as $20 per day depending on the bank. The issue is not really on the quantum of bond notes pumped into the system but to address the fundamentals as highlighted in my previous article, which include revamping production.
The country should avoid implementing one-day solutions as they normally associated with more outcomes that are undesirable. It was not the best option in the first place to issue the “surrogate currency” as a solution to the challenges facing the export sector.
