War on cash won’t help
SINCE government announced in May it would be introducing a new promissory currency in the form unheard of bond notes backed by a US$200 million Afrexim facility, there has been a sustained war on cash in the financial system.
Given the current severe liquidity and cash crisis, it sounds like an oxymoron but that’s what is happening. Faced with serious cash shortages, government — bereft of sustainable solutions as usual — chose an unusual remedy: To go on a warpath on cash under the rubric of promoting plastic money or electronic transactions. Those selling pointof-sales machines made roaring business.
But the question is: Will this resolve the crisis? Are authorities not just tinkering with the symptoms, while being unwilling or unable to deal with the root causes of the problem?
How did we get there? Well, the overall context is extended periods of misrule and economic mismanagement. Specifically, Zimbabwe’s unsustainable current account deficit and poor balance-of-payment position as well as massive revenue leakages and an uneven distribution of liquidity in the market are some of the variables.
The situation has in recent months exacerbated due to depleted nostro accounts balances which have been drained by the ballooning import bill. Banks have witnessed increased pressure on their nostro accounts as Zimbabwe is now a net importer due to a wave of company closures and a dramatic fall in production. This has resulted in banks being unable to import cash to meet their clients’ demands and properly perform their financial intermediation role.
This situation prompted the Reserve Bank of Zimbabwe (RBZ) to increase the percentage amount that banks could keep in their nostro accounts from 5% to 10% of total deposits. The depletion of nostro accounts has resulted in increased bottlenecks in international payments.
Weakening commodity prices on the international market against the backdrop of an El Nino-induced drought have reduced export earnings. This in turn has resulted in the depletion of nostro accounts of banking institutions. With about US$3 billion current account deficit, Zimbabwe requires far-reaching measures to contain the import bill and improve the liquidity.
In a bid to stop the deteriorating situation, the RBZ governor John Mangudya on May 4 issued a statement on bond notes — which triggered a run on banks, saying the shortage cash as evidenced by queues at banks and automated teller machines was caused by the dysfunctional multi-currency system; low levels of use of plastic money and real time gross settlement platformsin a predomi- nantly cash economy; collapsing production, leading to higher imports; plunging confidence in the banking system; and inefficient distribution of scarce foreign exchange resources, among other things.
As a result, bank withdrawals were suddenly reduced to US$1000 from US$10 000 a day. Money which could be taken out of the country went down to US$5 000. However, in practice banks soon started giving clients much less than US$1000. The amount continued to go down until some banks went below US$100 a day. Now some banks sometimes run dry completely.
RBZ statistics show the use of cash in the economy has dramatically gone down as people and businesses shifted to electronic transactions. For instance, in September transactions processed through the RTGS system increased by 11,6% to US$4,38 billion from US$3,93 billion recorded in August 2016. The volume of transactions registered a 14% increase, from 253938 in August to 288523 in September.
The battle against cash seems to be succeeding, at least for now. But will the war be eventually won?
Without addressing the fundamentals, that is political, economic and structural problems, it won’t work. Studying India’s current cash crisis might help, but then again the situations are very different.
If the currency crisis is not handled properly, the resultant economic impact could be much worse, much longer, and very different than what we’ve seen in the past.