The $400 million injection into the economy might not be the answer to Zimbabwe’s cash crisis

CLAIM:

The Sunday Mail this week reported that Zimbabwe’s bank note shortage would ease, following US$400 million cash imports by the central bank since the beginning of the year, as well as improvements in the production and sale of key commodities – gold and tobacco.

The Sunday Mail reports that the central bank’s bank note imports would soon ease Zimbabwe’s ‘cash crunch’

ROOT OF THE PROBLEM

Zimbabwe’s current bank note crisis intensified in the first quarter of 2016, when long lines re-emerged at the banks for the first time since 2009 when the country abandoned its currency for the United States dollar, South Africa’s rand and other foreign currencies in a bid to tame hyperinflation.

While the authorities attribute the bank note crisis to the smuggling of physical bills from the country as well as a widening trade deficit, economic analysts also add unrestrained government spending to the list of causes.

Since dollarization in 2009, Zimbabwe has shipped out US$31 billion to pay for imports, against cumulative export receipts of just over US$20 billion for the period.

Zimbabwe’s cumulative imports since 2009 reached US$31 billion in 2017, against US$20 billion exports over the period.

The country has lost significant production capacity, partly due to its industries’ inability to recapitalise and due to the relative strength of its adopted currency – the United States dollar – against major trading partners, especially South Africa.

When Zimbabwe dollarized in 2009, the United States dollar was worth just under 10 South African rands. The rand weakened significantly, nearly touching 17 to the greenback in January 2016, further eroding the competitiveness of Zimbabwean products against those originating from its biggest trading partner.

The rand’s weakness has also diminished its acceptability as a medium of exchange in Zimbabwe. In 2009, rand use rivalled that of the greenback, with each currency accounting for about 45 percent of domestic transactions each. By 2016, virtually all local transactions were being conducted in United States dollars.

In the early years of dollarisation, South Africa’s rand circulated broadly in Zimbabwe, but its weakness against the greenback has diminished its use in daily commerce

State spending has also spiralled, with government raking up a cumulative budget deficit in excess of $3 billion between 2014 and 2017, funded through its debt security of choice – Treasury Bills issued to banks.

“As the principal and interest payments on these government securities are settled on the RTGS (real-time gross settlement system), it is clear that the government has been using the issuance of this debt to effectively print money,” London-based Exotix Capital Partners wrote in a 2016 note on Zimbabwe’s currency crisis.

In effect, government had sucked hard currency out of the banking system, replacing it with electronic balances, Exotix, an investment banking and advisory firm focusing on emerging markets, noted.

Bank balances with the RBZ, which stood at $112 million in January 2010, had risen to $2.6 billion by December 2017. Meanwhile, balances with foreign banks, which averaged US$500 million before the crisis, were down to about US$200 million in December 2017.

Bank lending to government, which resumed in 2012, reached $2.4 billion at the end of 2017.

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