Zimbabwe requires fresh capital of at least $5 billion in credit lines for the banking and private sectors to push its domestic financing as a percentage of Gross Domestic Product (GDP) to 80%, an economist has said.
BY TATIRA ZWINOIRA
The economy is groaning under a severe liquidity crunch due to the absence of fresh capital from external sources, low exports and low foreign direct investment (FDI) inflows.
Oxlink Capital (Pvt) Ltd managing director Brains Muchemwa told Standardbusiness that access to credit facilities had been very limited since 2013.
“Zimbabwe, with domestic financing as a percentage of GDP around 31%, is among the lowest in the world. Pushing this to desirable levels of around 80% of our GDP would require fresh funding of around $5 billion, with the hope that the absence of reserve requirement in the market will quickly spike money supply,” Muchemwa said.
He said the high cost of credit and short-term nature of most credit facilities in the market pointed largely to the liquidity challenges that have beset the market since the end of 2013.
“Resultantly, access to credit facilities has been very limited for the majority of corporates that require funding,” he said.
Financial securities expert Persistence Gwanyanya said FDI had remained depressed due to indigenisation laws and the unfavourable ease of doing business climate.
“Ideally, one would expect the capital flows to complement current account flows but the performance of capital flows, mainly FDI, has remained depressed weighed by indigenisation laws and unfavourable ease of doing business ranking. The country’s unfavourable risk profile has also affected the flow of external credit into the country,” Gwanyanya said.
“Lines of credit are limited and where available, they are very expensive. Reserve Bank of Zimbabwe [RBZ] estimated that external loans, income receipts and FDI accounted for 12% of flows to December 31 2015.”
He said repayments of interest on principal debt had also been identified as another significant outflow causing the liquidity squeeze in Zimbabwe.
As a result, the 19 banking institutions in the country have been introducing cashless solutions such as promoting plastic money, transactional banking, mobile banking, and internet banking since the beginning of January 2015.
The absence of cash has also led to cost-cutting strategies, a reduction in non-performing loans, and incentives to the public in order to attract deposits.
The limited credit facilities have made it hard for banks to transact using cash.
To help mitigate the challenges, RBZ has been issuing treasury bills (TBs) in order to allow banks and corporates to continue to make transactions.
However, this has been noted to be another constraining factor because of the interest rates charged on the TBs.
Gwanyanya said government had to pay the interest on the TBs that were issued against this debt together with principal on TB maturities which has exerted extra pressure on the government’s cash flows.
He said government was accused of creating money which was not backed by production, with the concomitant effect of deepening the liquidity challenges in the country.
According to RBZ statistics, broad money supply rose by 0, 4% at the end of December 2015 to $4,76 billion, which was due to increases of $263 million, $61,5 million and $44,7 million in demand, savings and long-term deposits respectively.
In a recent economic outlook report, the Zimbabwe National Chamber of Commerce (ZNCC) said while the deposit interest rates offered by banks appeared attractive, the minimum amount required was too high.
ZNCC said “the public does not have much cash to open these highly-rewarding fixed deposit accounts considering the prevailing liquidity constraints”.
However, ZNCC said it was hoped the year 2016 would see banking sector confidence and stability improving as the Zimbabwe Asset Management Company continues acquiring non-performing loans.
The absence of a local currency means that the country cannot print money to plug liquidity gaps. The main sources of liquidity under the multicurrency regime are remittances, external trading and bank accounts.
Gwanyanya said the country should rebalance by reducing imports whilst increasing exports and at the same time attracting foreign capital mainly FDI and also open up more lines of credit.
He said while it would take time to address structural issues, it was imperative that government clearly spelt out and followed the roadmap to achieving a rebalanced economy.
“While this happens, the country should strive to create a cashless society which is supported by increased use of plastic money. The country is highly informal with more than $2 billion estimated to be circulating in the informal sector.
There is definitely need to tap into liquidity in this sector,” Gwanyanya said.
Analysts estimate that 69% of the people in Zimbabwe have access to formal financial services and the target is to take this to 90% by 2020.