Zimbabwe has US$304 million hard cash in circulation including US$73 million in bond notes as of January 2017, about a third of optimum demand, reflecting a worsening liquidity crisis, an economist said.
Ashok Chakravarti, who also advises the Office of the President and Cabinet on improving the ease of doing business, told a Confederation of Zimbabwe Industries (CZI) symposium on Thursday that hard cash in circulation inclusive of bond notes and US dollars was five percent of total bank deposits which has contributed to the country’s liquidity crisis.
“If you look at comparative studies from other economies cash to deposit ratio should be between 10 (percent) to 12 percent. If an economy has got less than 12 percent, it faces liquidity crisis…..We need $900 million in cash to have adequate liquidity,” said Chakravarti.
Hard cash circulation in the country has dropped by 53 percent from US$642 million in 2013 to US$304 million currently. However, bank deposits have increased from US$4,728 billion in 2013 to US$6,2 billion in 2016.
At the onset of the multi-currency system in February 2009, total deposits in the banking system were US$1,66 billion. Cash to deposit ratio has decreased from 35 percent in 2009 to five percent in January 2017.
At the onset of the multi-currency system in February 2009, total deposits in the banking system were US$1,66 billion. Cash to deposit ratio has decreased from 35 percent in 2009 to five percent in January 2017. The amount of cash held in Nostro accounts declined by 61,6 percent from US$424 million in 2009 to US$163 million as at November 2016.
“When liquidity challenges first surfaced in 2014, the RBZ reduced cash holdings in Nostro accounts from 30 percent to 5 percent of total deposits to improve the availability of cash in the economy. This decision simply led to externalisation of dollar cash, exacerbating the liquidity crisis,” said Chakravati.
To resolve the liquidity crisis in the country, Chakravarti recommended that the government should reduce wage bill, stop reissuing of Treasury Bills and borrowing from the private sector, repeal the indigenisation policy and adopt the South African Rand.
The business community has voiced its distrust of government methods of dealing with the acute cash shortage of bank notes and urged an adoption of the Rand, a suggestion the State turned down.
Chakravati has previously suggested a three percent import levy across the board which he said could raise $2 billion (annually) to incentivise exporters in real currency instead of the bond note incentive.
Source: National Accord