With net foreign direct investment flows estimated to have declined from US$399.2 million in 2015, to US$254.7 million in 2016, perception risk has remained a reality and that has been our biggest challenge as an economy. This has made full economic recovery fragile and the road back to normalcy difficult. Policy makers should pull in one direction and focus on creating a friendly environment to attract Foreign Direct Investment
Liquidity constraints have continued to weigh on business despite the moves that have been made to promote the use of plastic money. With $370m (nostro + US$ cash) against deposits of US$6.5b: and demand deposits (54.63% of total deposits), mostly in the form of salaries, resulting in the lower cash to deposit ratio (total hard cash over deposits), the economy’s cash position is quite dire, implying that for every $1 one has in the bank, the bank can only honor up to $0.05 in cash when called upon to fulfil the depositors’ cash demands. Considering the high unemployment rate as well as the high levels of informalisation in the economy, the demand for cash remains high notwithstanding the policy incentives towards plastic money.
Liquidity constraints have seen business continue to lose loads of productive man-hours as employees spend disproportionate amounts of time queuing at the banks. There is therefore need to resolve the cash challenge urgently in order to restore confidence. Further liberalization of the exchange controls should be pursued to encourage more inflows. This is contrary to the current view that the liberalization of the exchange controls resulted in mass externalization.
The foreign exchange/nostro stabilisation facility of US$70m by the central bank, came at the right time when there are serious foreign exchange settlement gridlocks in the economy. The growing foreign currency challenges are likely going to start imposing huge burdens on businesses that have no strong bargaining positions at the banks to be allocated foreign currency.
Measures by the central bank to reduce the cost of doing business by reducing lending rates charged by banks from an upper limit of 15% to 12% per annum, and by reducing charges on the use of plastic money to as low as 10 cents for small purchases of $10 and below is a noble move in consideration of the need to curtail broad money supply growth given that it reduces the cost of doing business for businesses whose balance sheets are geared. However, the most important aspect to consider is that banks are price risk and the availability of cash when they lend. The high interest rates that have been prevailing, to a large extent, were reflective of the risk profile and scarcity of cash. It becomes imperative that the policymakers create a conducive environment that attracts investment and nurture positive sentiments. Measures to facilitate the construction and operationalization of economic activity enablers need to be put in place otherwise the prevailing growth trajectory will remain the same into 2017 despite a good 2016/17 agriculture season.
As we approach the second half of the year 2017, there is need to curtail liquidity constraints which are weighing on business operations and the economy. Economic growth potential will also be constrained by the external debt and a deteriorating domestic debt burden. The consumption-savings imbalance long-run effects of inadequate investment in infrastructure and business modernization will cap the growth rate. Any economic strategies initially contemplated must address key structural problems of low productivity, negative growth, corruption and the national debt. If addressed, this will demonstrate a mixture of optimistic expectation and fervor to invest in Zimbabwe from both local and international investors.