The country is reeling under a massive liquidity crunch and Government is now looking at appropriate ways of re-injecting liquidity into the productive sector, according to Secretary for the Ministry of Finance and Economic Development George Guvamatanga.
In simpler terms a liquidity crunch is a time when cash resources are in short supply and demand is high.
The liquidity squeeze comes as Government has gone about implementing tight austerity measures as more pronounced through the 2 percent Intermediated Money Transfer Tax as well as the removal of subsidies on fuel among other key interventions.
The focus to mop up liquidity from the market has been described as successful with Government taking every opportunity to highlight its achievements including a primary budget surplus.
The liberalisation of the exchange rate, combined with ongoing fiscal consolidation reforms rolled out since October 2018 and a complementary tight monetary policy, have managed to contain excessive money supply growth, which had been the main driver of inflation, Finance and Economic Development Minister Mthuli Ncube told Parliament in his 2019 Mid-Year Budget Review and Supplementary Budget recently.
“Government measures to contain fiscal deficits by capping borrowing from the Central Bank, non-issuance of TBs, as well as stringent expenditure control measures, have significantly restrained money supply growth,” he said.
Minister Ncube added that the Reserve Bank of Zimbabwe, in complementing fiscal consolidation, is actively mopping up excess liquidity through saving bonds issuances, as well as RBZ foreign exchange sales to the inter-bank market.
“If this path is maintained, the RBZ would meet its reserve money growth target of 10 percent
by year-end, that way anchoring inflationary pressures,” said Minister Ncube.
Mopped a little bit too much?
But according to Guvamatanga, it seems treasury has mopped the life out of companies and the liquidity squeeze could cripple operations.
Speaking at a post 2019 Mid-Year Budget Review breakfast meeting in Harare on Monday, Guvamatanga said the market is now reeling under a heavy liquidity crunch.
“The challenge we are facing on the market at the moment is a shortage of liquidity and our concern now as Government is how do we find ways of re-injecting liquidity into the market, but targeted at the productive sectors of the economy,” said Guvamatanga.
He gave an example of the US$1,2 billion unsettled payments, where companies were supposed to transfer the local dollar equivalent at a 1:1 parity, but have since failed to do so.
“When we probe around the unsettled foreign obligations, the governor (Dr John Mangudya) actually requested that those affected to provide the necessary supporting local currency and nothing has come to the RBZ because there is no liquidity in the market. So the reality is we have already mopped up all the liquidity in this market and business in this market will tell you they are desperate for liquidity,” he said.
As a result, Guvamatanga said, Government is now looking at “ways of putting back this money into the market.” Analysts suggests
While Guvamatanga did not reveal how government would solve the liquidity squeeze, analysts said this has to be done in a way that does not escalate inflationary pressures. “Intervention through monetary policy is susceptible to escalated inflation levels compared to fiscal policy,” said Respect Gwenzi an analyst with Equity Axis.
Tax reliefs may be best interventions as they have a close relationship to production and productivity, he added.
Another analyst Walter Mandeya suggested that government cut interest rates to allow business and individuals to borrow again.
“Another option would be for the RBZ to buy treasury bills that are in the market or to buy foreign exchange,” he said.
He also suggested that Government should consider removing the 2 percent tax which has helped mop up liquidity in the market.
“The 2 percent tax has transferred value from people who are productive to those who are not, government included. They should remove the 2 percent tax and allow the market to re-balance itself.
“If you think about it the 2 percent tax was introduced to mop up the RTGS balances that were created by the RBZ that debased the 1:1 with the USD. If there is no liquidity, it means they have over mopped through the 2 percent because that is the only instrument being used to mop up liquidity,” said Mandeya.
Economist Persistence Gwanyanya, agreed and said it is advisable for treasury to support local liquidity by winding down austerity measures.
“Just like dollarisation, whilst austerity was necessary it becomes dangerous when it’s now like permanent. Beyond stability, largely ushered by austerity, we should seek growth by budgeting for an acceptable deficit say under 5 percent. We may even need to take advantage of salaries that are lagging behind to increase the same as a way of stimulating the economy. Treasury bills and as well as savings bonds repayments will also be necessary to inject liquidity in the market,” said Gwanyanya.