Radical decisions needed to solve liquidity issues

Radical decisions needed to solve liquidity issues
Published: 25 November 2013
WITH the biting liquidity crunch persisting, there is need to look at broader ways of improving cash in circulation as the prevailing economic hardships are largely being reflected in constraints in access to affordable medium- and long-term finance.

Under the multiple currency regime, major sources of funds in the absence of printing money include export revenues, foreign direct investments, foreign aid and remittances from the Diaspora.

However, most of these sources of funding have not performed well.

Export revenues, in recent years have been subdued due to lack of competitiveness and export capacity.

Imports have exceeded export revenues by more than 50 percent, leaving the country with wafer thin foreign exchange reserves, and ultimately reducing money supply required to oil economic activities.

As noted from events in the country, Zimbabwe has become a "dumping" ground and cash machine for foreign players, with South Africa dominating the local retail shelve space.

With respect to FDIs, the inflows have plummeted since the beginning of the new millennium due to the perceived country risk.

In 2012, the FDIs recorded in Zimbabwe were a mere 1,1 percent of Gross Domestic Product, falling from the 20 percent levels in the mid-1990s.

The drought of FDIs has in a way worsened the liquidity challenges.

With regard to Diaspora retentions, the effectiveness of their contribution has been watered down by the fact that the country is using multi-currencies, mostly US dollar which has automatically eroded all the arbitrage and speculation opportunities.

Zimbabweans living abroad are also finding it hard to send substantial amounts of money due to the global economic slowdown.

Lessons from West Africa, however, show that the Diasporans contribute significantly to economic development in their respective countries.

Zimbabwe last received foreign aid from multilateral institutions in the late 1990s.

Most of the aid the country is receiving is humanitarian and is not as significant as developmental aid.

Zimbabwe remains an unattractive destination for international finance, largely due to external debt estimated at about $11 billion.

This has resulted in the unavailability of long-term funding with the available short-term loans being too expensive to assist industry.

"From this analysis, one can see that if we don't take radical decisions and painful ones too, we are going to stay with the liquidity problems until the cows come home," economic analyst Mr Gift Mugano said.

"We must stop exporting jobs, raise capacity utilisation to enhance competitiveness, export capacity and make available long-term funds for working capital and retooling."

He added that there was need to considering backward and forward linkages between agriculture and the rest of the economy especially in manufacturing.

Mr Mugano said there was need to fix agriculture production and productivity, which would then support the manufacturing sector.

That would reduce exports, save the money spent on imports, improve money in circulation and boost employment, thereby improving Government revenues through taxes.

He added that in the short term, the country needed to strengthen procurement rules and depart from current ones which favour foreign suppliers and obviously create room for outflow of funds.

There is need for broad-based rules that allow legitimate Zimbabwean companies to participate in the supply chain management.

"This will automatically become the panacea for liquidity problems in Zimbabwe. One has to ask on how much money is externalised by the mining sector and retail sector," he said.

"In my view, this is an easy way of dealing with liquidity as it is the best practice internationally. In the same vein, the 2014 National Budget must not rely on the national economy as receipts from taxes are dwindling.

"It is our sincere hope that Government is talking to friendly countries with regards to borrowing funds to support the fiscus."

In the medium term, he said the liquidity problems can be addressed if the Sovereign Wealth Fund is established.
- herald
Tags: Liquidity,


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