Plan to introduce bond notes fuels cash crisis

The cash shortages are taking place against the backdrop of a domestic economic crisis fuelled by low global and regional growth, prolonged poor commodity prices, and severe drought that has left at least four million Zimbabweans in need of food aid.

“These factors have combined to exacerbate existing domestic challenges stemming from deflation, growth stagnation, weakening fiscal stance and persistently low productivity in Zimbabwe,” noted Moody’s.

“The country’s external competitiveness has been impeded by a sizeable real exchange rate over-valuation, driven in part by the multicurrency regime peg to the resurgent US dollar.”

The agency said government’s increasing fiscal deficit and excessive treasury bill issuance, required to finance its activities, have contributed to the cash and liquidity shortage by depleting the banking system’s liquid assets.

Reports suggest that the government has failed to honour TBs issued by the central bank worth $1.5 billion on maturity, with the paper being rolled over.

“The government has also contributed to a strain on the banking sector via heavy borrowing from domestic banks, even though it has limited capacity to service the debt and has to roll it over instead, weakening the banks’ liquidity positions and solvency,” said Moody’s.

It adds that Zimbabwe’s balance of payment challenges will continue unless the country implements sustainable fiscal policies and comprehensive structural reforms. With protracted balance of payments pressures, dollar shortages are likely to intensify.

In addition, the inability of enterprises and households to obtain sufficient cash for daily transactions will weaken economic activity and put pressure on growth, in turn lowering government revenues, said Moody’s.- The Source

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