Subdued production capacity and low Foreign Direct Investment
In plain economic terms, the contraction of industrial output is affecting money supply negatively. Money follows production and the local economy can hardly produce, and this is worse especially looking at the state of key sectors such as mining and agriculture.
Take a hypothetical family which grows tomatoes for a living; when yields are low and it happens for successive seasons, the amount of money at the family’s disposal is bound to run low. The family therefore requires a stimulant to reverse the situation.
The stimulant Zimbabwe needs is investment and savings. These are two fundamentals that can prop up the economy and ease some of the liquidity challenges the country is facing.
Low aggregate demand, low incomes and high unemployment
When the factors of production are lying idle, it is absolutely inconceivable to hope for a miracle when the economy slides and liquidity becomes an issue.
Low incomes and high unemployment have led to a situation of low aggregate demand. This situation is damaging as it further impacts on production capacity.
Liquidity preference
The great economist, John Meynard Keynes, said that demand for money is determined by three motives, which are transaction motive, precautionary motive and the speculative motive.
Applying these three motives to Zimbabwe, the transaction motive has not worked for the local economy considering the fact that we are importing the bulk of the products used for household and industrial use.
The precautionary motive is one which has worked against the financial system, where economic agents prefer to hold their money balances and transact outside the banking system. In Zimbabwe, individuals and firms have lost trust in the financial system due to bank failures.
In a normal economy, speculative tendencies drive people to either save or invest but the situation is critically diametrically opposed in the case of Zimbabwe. The speculative motive in Zimbabwe is largely driven by fear of a return to the Zim dollar era. This can be argued as the reason why people have preferred to hold on to their money rather than using the financial system.
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