
Last Word
There are rumbling complaints in the business world over what is seen as tight liquidity and the determination of the Reserve Bank of Zimbabwe, with Government backing and Government fiscal policy backing RBZ monetary policy, to control liquidity.
This is change from the position a few months ago when the rumbling complaints were that there was excess liquidity, and especially excess periodic liquidity as a result of Government payments, even though these were from stored tax payments not from creation of money supply.
It seems that some businesses want the joys of almost unlimited liquidity along with stable exchange rates and almost zero inflation. The combination is impossible and that is why modern finance ministries and central banks have to move carefully.
The Zimbabwean Ministry of Finance, Economic Development and Investment Promotion and the Reserve Bank of Zimbabwe have clearly now decided on what comes close to a joint policy to maintain monetary stability, which requires that tight fiscal policy to back it, and then sort out the liquidity problems in ways that do not hamper growth.
Reserve Bank Governor John Mushayavanhu has made the telling point that the liquidity problems some businesses talk about are not so much a lack of liquidity but rather an inefficient and non-productive use of liquidity. In fact Dr Mushayavanhu thinks the total liquidity available is on the higher side, which is why he has been selling non-negotiable certificates of deposit at zero interest rates to mop up liquidity from banks that control too much.
He would like to see better distribution of liquidity through banks with surplus lending to banks that are short, as happens in other countries, with the bank rate being the interest rate.
Banks have also, in the past, been inefficient lenders pushing consumer and speculation loans rather than production loans. Most banks with large commercial customers using their bank to process salaries and wages were keen to lend to ordinary account holders one the security of those salaries. There was a pile of paperwork from the loans, but basically the account holder agreed that the bank could grab the monthly repayments before letting the account holder have the change, and that neither the account holder nor the employer would allow a switch of the salary receiving account to another bank during the lifetime of the loan.
While some of that money might have gone into productive businesses, most was spent on consumer goods, including vehicles, education fees, or even pure speculation, such as playing the foreign currency black market or the stock exchange. Bigger customers were borrowing and again speculative activity was the main use of the loans. Only when real interest rates were finally introduced via a real bank rate did the speculative borrowing fall right back, although not entirely eliminated.
Dr Mushayavanhu was the CEO of a major commercial bank at the time so he knows the temptations of making consumer loans on very high levels of security and just how profitable that could be. While banks did ask for what the loans would be used for, in many cases they did not make a customer’s sanctimonious expressions of intent a condition, and basically allowed the customer to spend the money as they wished.
He also saw what happened when real interest rates were introduced and the pricking of that speculative bubble and this seems to have helped drive his monetary policy in his new role.
High interest rates, and the 30 percent bank rate now in place is still higher than inflation, will make consumer borrowing expensive although there will be some who do not care, but will also hamper productive borrowing, especially for someone like an industrialist who needs a year or two to build and equip a factory before getting a new flow of revenue.
Some of the farming loans take as long before they produce returns, although basic crop financing can produce a return in a few months, and we cannot see how anyone at present in the mining sector can hope to make money if they borrow, except perhaps for a couple of weeks to meet bills while processing the latest sale of minerals.
One way of rationing liquidity would be by fiat, perhaps banning banks from making consumer loans. But that would be difficult and unfair. Consumers often need to borrow for other needs, such as health and education, and it would be expensive for banks to police their loans or to make direct payments for their loans to the expressed final payee, say a hospital or a school or a university.
But those are possibilities that could be introduced as administration costs continue to fall with modern technology. After all foreign currency payments are made on invoices by banks with customers buying the foreign currency to pay foreign bills not allowed to divert the money.
But more sensibly the Reserve Bank has gone for a targeted finance facility, where productive borrowers can borrow money when they need financing to increase production. The commercial banks are still involved, since they are the conduit of the funds available and are supposed to know their customers.
But the facility does help reallocate some of the liquidity that seems poorly allocated and does make liquidity available to a degree to some productive borrowers.
Zimbabweans have a borrowing culture and some retail chains have made money in the past through credit schemes for consumer goods. The surges of inflation have dampened enthusiasm for this but the desire is still there.
We do not have a savings culture, and while the inflation surges have discouraged that tremendously, we need some way of rebuilding what we did have and then pushing it forward.
It is unlikely that we will get something approaching the Chinese culture during the dramatic expansion of that economy.
In the later 20th century Chinese people, as incomes rose, still declined to borrow and paid cash for both small items and for larger consumer purchases such as cars. It was considered shameful to borrow rather than save up for a purchase and that created large deposits that banks could lend.
A double borrowing rate is once again a distortion of market forces and amounts to a subsidy for some borrowers, so would normally be discouraged by a central bank, rather than introduced by a central bank. But something needed to be done. The dual borrowing rate is a lot less damaging than any move towards boosting money supply and easing liquidity for all. Some sections of the economy probably need tight liquidity.
The other inefficiency in the Zimbabwean finance sector is the way foreign currency is allocated in the market and then used. Major exporters have tended to allow large sums to accumulate in their nostro accounts and many local businesses prefer payment in foreign currency, so maintaining those nsotro accounts and making sure the diaspora money is not converted but is instead spent, usually on consumer spending.
Even the complaints about foreign currency tend to rest of the sectors wanting foreign currency for consumer goods, local and foreign since some Zimbabwean manufacturers are effectively demanding foreign currency payments, but hiding such policies since they are illegal. But often those wanting to pay in ZiG to a Zimbabwean factory find they are last in line for orders or that the factory will not go all out to meet the order.
There is a range of responses but a couple of major suppliers are effectively pushing very hard for foreign currency.
Again the dual currency system is inherently distorting and the determination to store foreign currency in nostro accounts tightens foreign currency liquidity, talking large blocks out of circulation.