There has been a cash crisis in Zimbabwe for years now. The Reserve Bank of Zimbabwe which initially denied that was the case was forced to acknowledge the crisis as queues at banks refused to go away despite the central bank’s best efforts.
With the central bank acknowledging the cash crisis they had to give reasons as to why it exists and only after that could they come up with solutions. In the monetary report which was published in August they gave the main reason as inefficient circulation of money.
They went further as to explain that the reason for the inefficient circulation is the informal sector, the parallel (black) market.
See it is important to identify what the problem is and what is causing it before you come up with solutions.
What the World Bank and IMF think about the Zimbabwean cash crisis
The government faced with paltry revenues resorted to excessive borrowing, utilised its overdraft facility and issued Treasury Bills to raise funds. The overdraft facility which entailed the RBZ would through the RTGS electronic system credit bank accounts of payment recipients. These transfers were of course not supported by cash reserves
The effects of the above was best put by the IMF,
These transactions increase deposits in the banking system, but without a concomitant increase in the quantity of US dollars available in cash or external (nostro) accounts. To finance the remainder of the deficit, the government issued T-bills, mainly acquired by commercial banks but also used as payment for services.
The Zimbabwean government’s expansionary fiscal policy is responsible for the cash shortages. In the process the government crowded out the private sector as there was a 38.67% growth in net credit to government compared to 2% to the private sector.
The Zimbabwean government’s spending is a cause for concern especially the perennial problems with a high wage bill.
What needs to be done?
The biggest problem is that the RBZ is not run independently of political influences. We need the central bank to be free to come up with policies meant to resuscitate the economy and not to support political agendas.
You can clearly see the conflict that the RBZ faces because even when they say the cause of the cash crisis is inefficient circulation of money they also acknowledge that it is government spending that’s really to blame. In the latest monetary report the RBZ said,
The root cause of excess demand for forex, on the other hand, is emanating mainly from increases in money supply as a result of greater spending by government, money-creation loans and overdrafts by banks. It is these external and domestic imperatives or fundamentals that need to addressed to bring equilibrium and resolve the challenges besetting the economy.
You have to comb through the monetary policy to find this tidbit. If asked, the RBZ will stick to the inefficient circulation statement. The governor is clearly in a pickle, he can’t be seen to be pointing the finger at the government and so he finds the next best explanation, one that shifts blame away from the government.
Regarding the hoarding of cash by Zimbabweans, yes, there is that but the World Bank says,
It is about creating trust. Why do I need to keep cash at home? It is because I am afraid that tomorrow I may need the cash and that I may not get it. That is why if I have excess cash I will keep it at home so that if I need it tomorrow I will use it. So overall, it is an issue of creating trust in the economy and that is the responsibility of the government which also should be talking to the people, but more or less acting.
So in short the first steps that need to be taken to resolve the cash crisis include removing government and politicians’ influence in the decision making process of the RBZ, fiscal responsibility which entails managing government spending and increasing productivity whilst attracting foreign investment.
Granted the problems we face cannot be easily resolved but the first step still has to be taken.
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