Liquidity crunch: the saga continues

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A story carried in the weekend press about a businessman who committed suicide over an intolerable debt situation marks a milestone in the unfolding liquidity crisis in Zimbabwe. Deep recessions and depressions are known for resulting in such developments worldwide, and for Zimbabwe, this may be a tip of the iceberg.

What is particularly worrying in our economy is the absence of a debt counseling and debt management industry, where professionals can assist people caught up in such desperate scenarios so that they do not resort to the ‘solution’ that this businessman chose. Instead, we have a vibrant and mostly illegal ‘debt collection’ industry that just worsens already precarious situations. Far from assisting the creditor, a lot of them are known for actually pocketing the proceeds of their illegal activities, and quite often the creditor ends up having to get another debt collector to chase up on the first one!

While it is difficult to measure and monitor instantaneous liquidity developments, September seems to have seen a worsening of the general liquidity situation. Traditional issues like school fees normally drain cash from the general populace around this time, but since most of this money is still within the country’s borders, that effect is expected to be transitory. From general discussions with several industry and commerce players, and from observing activity on the Zimbabwe stock exchange, however, it appears cash has become an extremely scarce commodity.

Some recent developments may or may not have caused a sharp contraction in the economy’s cash in circulation. The seven and fourteen day ultimatums issued to certain foreign companies, as well as the threat to move the indigenization drive into the manufacturing sector could (and I emphasise the word ‘could’, in the absence of substantive information) have seen a drive by the more risk-averse, potentially affected local investors to move liquid assets out of the country. Such a scenario is not implausible. Depositors moved $1.2 billion from the indigenous banks to the international banks in the wake of the Renaissance debacle, and investors do proactively manage their money in response to perceived or actual risk factors.

September also saw the full implementation of the new duty regime announced in the mid-year fiscal policy review. While the percentage numbers may have seemed small on paper, the impact when it comes to dollar values is major. Informal cross-border traders are wailing, and the issue of price increases has seen an absurd blame game playing out between government, manufacturers and retailers. Wild speculation about the return of high inflation has also done the rounds.

An increase in duty raises the cost of goods sold, so it is weird how the responsible authorities start to foam at the mouth as to why retail prices have increased, and accuse businessmen of being saboteurs. It reminds me of the situation we had a while ago where banks expected retailers to buy rand coins from them using the prevailing formal US dollar exchange rate of around 1:7, when it is common knowledge that the street rate for these coins is 1:10. Have we become a nation of politicians, always creating problems and trying to pass the blame onto whoever appears to be the weaker target?

A basic but pervasive definition of high inflation is “too much money chasing too few goods”. If anyone believes that there is too much money in Zimbabwe right now, I would say they need to have their head examined. Increases in duty and in input costs would ordinarily result in what is referred to as cost-push inflation. This is different to the demand-pull variety which results from too much cash, as mentioned above.

Cost-push inflation in an environment where there is no liquidity (such as ours) will cause several developments, none of which results in rampant inflation. In a competitive market (such as our retail industry), a rise in input costs will not necessarily result in price increases to the end user. Industry players will generally try to absorb as much of such costs as is possible, as price will be a major point of competition. Monopoly situations are what can result in end user price increases, and the recent ZESA tariff hike is one such example. The petroleum industry is another area where cost increases tend to get passed on to the end user.

The negative effect of cost-push inflation is that businesses will be forced to cut other costs in order to accommodate unavoidable increases in input costs.  Generally, reducing staff numbers is the most pervasive cost-cutting strategy, so expect more jobs to be lost.

At the consumer level, because incomes are not increasing, consumers will re-align their expenditure so that they buy less of certain items, and totally do away with others. Interestingly, September has also seen ZESA and local authorities embarking on a blitz to collect outstanding dues. Water and electricity being non-negotiable necessities, significant financial resources have no doubt been diverted to this area.

When you aggregate this consumer behaviour, we end up with declining sales for companies, and a decline in GDP at the national level. Companies producing goods and services deemed to not be basic will be most affected, and many will close. The process feeds on itself and the economy will shrink, instead of expanding.

So while inflation may remain contained, the targeted growth rate is what will come into question. Right now, it is difficult to see what government is doing (other than issuing policy statements and attending various ‘indabas’) to encourage growth. Sectors that show any sign of promise are immediately flagged for indigenization. If money to buy these companies was available, perhaps this issue could be tackled expeditiously so that companies focus on production. In the absence of money, the only thing that will happen is endless horse-trading (imagine trying to reach agreement with someone who wants to ‘buy’ something from you, and they don’t have any money!) and a loss of focus on the much-anticipated growth.

The most worrying development, from a business perspective, is the recent Wikileaks debacle, which will no doubt result in politicians completely losing focus on the economy. Several will also have to re-double their efforts on destructive populist policies in order to prove their allegiance. The last quarter of the year will be telling in terms of where our economy is headed. The only solace is economies never collapse, as we’ve now come to know. They just fade away.

Adway Financial Services

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