HARARE – Zimbabwe requires close to $1 billion fresh capital to reduce the current cash crisis, a leading economist has said.
Renowned economics professor and advisor to the Office of the President, Ashok Chakravarti, said the country, which has been battling acute cash shortages for close to a year, must come up with new strategies to attract new cash.
“We need a cash to deposit ratio of around 15 percent to prevent liquidity problems in an economy, mind you, the current ratio is at four percent.
“Currently, we have $6,2 billion in deposits with real cash in the system at $304 million… So we need about $900 million as cash in circulation and nostros, to escape illiquidity,” Chakravarti told delegates at a recently-held Confederation of Zimbabwe Industries roundtable.
Official statistics show that the country has a paltry $232 million in circulation, with a shortfall of almost $700 million.
Chakravarti noted that while the country introduced a parallel currency in the form of bond notes last year, the cash to deposits ratio remains pathetic.
“Even a full bond note issue of $200 million will therefore not make a difference. If ratio of bond notes to US$ is increased beyond current proportion, then it will no longer be a multi-currency situation and premiums will start emerging on US$ versus bond notes.
“As the cash shortage deepens, this premium will rise and can be viewed as representing the depreciation rate of the new currency in the form of Real Time Gross Settlement balances. The value of all deposits will decline in terms of real US$,” the economist said, adding bond notes could ease the liquidity situation a little bit, so long as there was an adequate supply of US$.
When Zimbabwe adopted the multi-currency system, total deposits in the banking system were $1,66 billion, but the cash to deposit ratio plummeted from 35 percent in 2009 to five percent in January 2017.
Hard cash circulation has also slumped 53 percent to $304 million currently from $642 million in 2013.
In spite of this, bank deposits have increased from $4,728 billion in 2013 to $6,2 billion in 2016.
Chakravarti said the surge in deposits was not a result of more money in the economy, but a direct consequence of government over expenditure on salaries.
“Do not be fooled to think these deposits are actual people depositing into their accounts, no! It is just a reflection of government salaries being deposited…
“And to keep up with this expensive habit government has kept of its workforce which took up 93 percent of total revenue last year,” he said.
The economist also said Treasury needed to shut down government’s overdraft facility with the central bank as well as put a stop to the issuance of Treasury Bills (TBs), which are being used by government to honour obligations to the private sector.
While governments ideally have a limit to overdrafts they can get from respective central banks, with over expenditure forcing the ministry of Finance to borrow money from the market and has run up a massive debt in TBs and a very large overdraft at the RBZ.
“In addition to Treasury Bills, government has an overdraft with RBZ. The sudden increase of commercial bank balances with the RBZ from $543 million in 2015 to over $1 billion in 2016 suggests that an overdraft of at least 500 million has been provided.
“This is clearly unsustainable; you do not need to be an economics professor to see this…,” he said.