Cash shortages – the real causes and the wrong diagnosis

Government spending

Government spending is a critical component of the economy as it sets the tone for fiscal policy. Over the years, government spending in Zimbabwe has been largely skewed in favour of consumption (wages and recurrent expenditure) as opposed to capital expenditure such infrastructural development, mainly because the country is unable to run a capital budget.

What makes the situation worse is the fact that the recurrent expenditure is met with low local production capacity.  On the contrary, in situations where capital expenditure is prioritised especially on projects with a positive internal rate of return, the liquidity position is enhanced through the repo effect of employment and income.

Weak banking/financial system

As financial intermediaries, banks play a leading role in issues to do with liquidity. Evidently, most banks in Zimbabwe are not able to cope with the current shortages.

Some of the banks are liable for the current situation because of poor risk management practices that have led to a lot of non-performing loans, thus impacting negatively on the whole financial system.

The BASEL Accord stipulates a lot of fundamentals that guide banks to ward off liquidity and credit risk, but the current situation where a lot of banks are not able to cope with cash shortages exposes their non-compliance to basic tenets governing risk management.

The wrong diagnosis

To ease the problems of cash, the Reserve Bank of Zimbabwe has announced the introduction of bond notes. Considering that the bond notes are backed by a US$200 million facility from AfreximBank, there is hope and guarantee that the bond notes will only be a fraction of the United States dollar holdings which are approximately around US$3 billion.

However the bond notes are just a short term solution as the problem of liquidity will still resurface in the long term.

The problem with Zimbabwean policy makers is that they overlook real problems and use the wrong diagnosis.

Has there been a proper risk analysis to ensure that the introduction of the bond notes will not affect the foreign reserves already in the system? Remember, economists always say bad money drives out good money. Not to suggest that bond notes are bad money, but it is imperative that such major decisions that have a huge bearing on the economy be subjected to a lot of scrutiny and risk analysis.

It is important that monetary authorities return to the basic tenets of economic management. Cash shortages or illiquidity is not a challenge on its own, but a derivative of underlying economic implosion. This is not the time to be looking at solutions for the cash crisis. It is time to look for solutions for the economic problems bedevilling the country so that liquidity is guaranteed in the short to long term.

By Ngonidzashe Makaha for The Source

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