How can you have a cash crisis when you don’t have a currency?

How can you have a currency crisis, when you don’t have a currency? A few years ago, after the hyperinflationary meltdown in 2008, Zimbabwe was in strong recovery mode.

GDP doubled by 2012, on the back of rebounding commodity prices, a surge in wages and consumption of imported goods.

Since then foreign capital inflows have dried up and exports have fallen. Consumer prices have fallen just 6% from their peak even as neighbouring South Africa has seen a 40% currency depreciation.

The lack of downward wage adjustment in Zimbabwe has maintained excessive import demand which has now used up most of the foreign currency in the country.

Dollar deposits in the banking system have become theoretical, a little like euro deposits did in the recent liquidity squeezes in Greece and Cyprus.

The government might put money into employee bank accounts, but there is no cash to withdraw from the bank account. Zimbabwe is bust. Again.

The government is trying a variety of approaches to deal with this problem. It has stopped paying wages in full, but this has triggered a strike.

It has banned the import of some consumer items, which has added to protests.

It appears to be restricting the repatriation of export earnings; this is not a sustainable policy choice.

The government is pushing forward a 99-year land lease law to encourage investment in agriculture, but we have not seen evidence that this will attract cash inflows.

The authorities are trying to encourage locals to price in rand, but coming after five years of rand deprecation, this will still require deep price cuts to improve the current account.

Zimbabwe is borrowing $200 million to back new ‘bond notes’ due for release into the system in October, which many fear will lead to unbacked currency issuance in the future.

Of all the measures, the most high profile is the aim to borrow money to clear arrears to the IMF, World Bank and African Development Bank, with the aim of encouraging private capital inflows by end-2016.

The underlying problem is that hyperinflation wiped out private sector savings, and the government failed to grow its own savings during the boom-time.

It is reliant on export values to pick up (gold is up 27% YtD, but all exports need to rise 100% to close the trade deficit) or foreign capital to improve liquidity.

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