Liquidity crunch sparks chaos

LIVINGSTONE MARUFU AND CLOUDINE MATOLA

The severe liquidity squeeze, which follows the sharp depreciation of the Zimbabwe Gold (ZiG), has stifled economic activity and left  businesses reeling  and struggling to  stay afloat.

The cash crunch also casts a shadow over the festive season.

Multiple analysts told Business Times, a market leader in business, financial and economic reportage, that tightened monetary policies by the Reserve Bank of Zimbabwe (RBZ), aimed at stabilizing the ZiG currency and controlling inflation, have inadvertently disrupted business operations, constrained access to credit, and triggered turmoil in capital markets.

The RBZ’s liquidity-tightening measures, implemented in October, were introduced following the sharp depreciation of the ZiG in September. During this period, the currency plunged by over 40% on the formal market from ZWG13.99:US$1 to ZWG24:US$1. Yesterday, the ZiG was trading at ZWG33:US$1. On the parallel market, Zig was trading ZWG45:US$1.

To stabilize the currency, the central bank reduced money supply, a move that has left businesses grappling with limited cash flow.

The analysts warned that unless these measures are balanced with increased production and economic reforms, the country risks deeper financial instability.

Economist Christopher Mugaga, who is the CEO of the Zimbabwe National Chamber of Commerce (ZNCC), expressed deep concern over the escalating liquidity crisis.

“The scarcity of the ZiG is evident, making credit access increasingly difficult for businesses. While controlling liquidity can stabilize the exchange rate, this approach without a corresponding increase in production risks further economic instability,” he said.

Mugaga emphasized that monetary stability requires balancing liquidity management with productivity growth.

 “If liquidity is not linked to production, inflationary pressures and a loss of confidence in the local currency are inevitable. Increasing output is critical to absorbing liquidity without stoking inflation,” he said.

Another economist Vince Musewe warned that restricting liquidity without boosting production could lead to economic stagnation.

 “Liquidity control must be carefully balanced to avoid stalling economic transactions and growth,” he cautioned.

Industry players warn that the current liquidity crunch is reducing aggregate demand, production levels, and overall business viability.

 A senior banker, speaking on condition of anonymity, noted: “The liquidity squeeze has curtailed lending, leaving businesses unable to secure the funds they need. This is particularly harmful during the festive season and for farmers who require post-drought financing.”

The Bankers Association of Zimbabwe (BAZ) acknowledged the challenges, stating that while banks continue lending, constraints on money supply growth and foreign currency reserves limit their capacity.

Yet another economist and Monetary Policy Committee member Persistence Gwanyanya stated that the measures are part of a broader strategy to stabilize the economy.

 “Tight liquidity conditions support short-term stability, but for sustainable growth, we need a balance between stability and increased economic output,” Gwanyanya said.

The Zimbabwe Stock Exchange (ZSE) has also been hit hard by currency instability. The migration of major companies to the Victoria Falls Stock Exchange (VFEX) has drained liquidity from the ZSE, leaving brokers dependent on a few counters like Econet, Delta and a few others.

Arnold Chibvongodze, secretary of the Stock Brokers Association, highlighted the challenges.

“With major contributors to local currency liquidity moving to VFEX, ZSE trading volumes have plummeted.

Dual-currency operations further complicate the market, leading to speculation and inefficiency,” he said.

Chibvongodze proposed adopting the South African Rand to reduce currency volatility and simplify trade.

“A single currency system would ease regional trade and eliminate the complexities of dual-currency operations,” he said.

The Securities and Exchange Commission of Zimbabwe (SECZim) acknowledged the liquidity challenges, noting that ongoing reforms, including the introduction of Exchange-Traded Funds (ETFs), aim to enhance market stability.

 “We are addressing these issues at a high level to ensure sustainable solutions,” said SECZim representative Takawira Bote.

As Zimbabwe navigates these challenges, experts agree that a multifaceted approach is critical. This includes boosting productivity, implementing regulatory reforms, and harmonizing currency policies. Achieving this balance will be crucial to fostering long-term economic stability and growth in the country.