Cash Crisis in Zimbabwe-Article By Equity Axis

A look at Zimbabwe’s cash crisis-Article by Equity Axis

• Zimbabwe has been plagued by an acute cash shortage and a forex liquidity crisis which is threatening economic stability and growth prospects. 
• In simple terms there is no sufficient cash at banks for customers to transact.
•  Nostros which hold forex on behalf of local depositors transacting outside the country have grossly depleted. 
• Notes, either in USD or bond (Zimbabwe surrogate currency) have vanished from the system as scarcity gave room for arbitrage and speculative activities.
• Concurrently deposits levels has soared and with the variable’s surge a resultant hard cash gap has emerged in the market which has degenerated into a crisis. 
• This reports looks at the mechanics of the cash crisis highlighting the possible drivers in our view. 
• An overview of the numbers provided by the RBZ shows that on dollarizing in 2009, Zimbabwe had only $1.2 billion in total deposits with ban
• At that respective point notes and coins within banks amounted to $158 million and these were buttressed by a respectable $424 million in nostro accounts to give a total hard cash balance of $582 million. 
• This hard cash balance was an equivalent of 49% of total deposits with banks which means banks had more than enough capacity of close to 50% to meet depositors obligations either through cash or nostros. 
• 8 years later in 2017 the deposits base had grown by 544% to $7.6 billion while hard cash balances which is a summation of notes, coins and nostros have declined by 51% from $582 million to $284 million. 
• As a consequence the ratio of hard cash to deposits has plummeted from the 2009 level of 49% to a measly 4% as at December 2017.
• This means that banks’ capacity to meet depositors obligation has drastically reduced. 

•  To explain the present challenges is a third force, government borrowings. There was stability in periods before government began issuing Treasury Bills for purposes of funding its budget deficit among other pursuits such as capitalising ZAMCO.
• It follows that government could not adequately finance its budget needs utilizing own resources and being incapacitated to solicit international budgetary support from IFIs, resorted to local banks. 
• In some instances government felt compelled to bail out ailing companies and capitalising institutions such as RBZ in turn issuing out more money, thus driving deposits levels up.
• On extending loans to govt money supply shot upwards sharply and the supply growth is reflected through deposits spike. 
• Government has hinted on taming TB issuance but 4 months data shows borrowings and interest due from government of close to a $1bn.
• In trying to close the gap, exports growth advocacy has been pursued, but at the rate of government borrowing this pursuit is tantamount to chasing a moving target.
• A seemingly misguided approach to command (which commands a good share of the TBs) a significant portion of the economy, has ready consequence whose payoff need be prudently factored when evaluating effectiveness of the policy measure.