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Liquidity squeeze hits Zim firms

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Zimbabwean companies this week showed signs of stress following an unprecedented decision by the Reserve Bank of Zimbabwe (RBZ) to suck out liquidity in the market, Business Times can report.

The central bank rattled industry and commerce after it took a deliberate action to regulate the quantity of money in circulation and has introduced gold coins to mop excess local currency balances.

The central bank has sold 6800 gold coins, mopping over ZWL$5.5bn from the market.

Business leaders this week said the liquidity squeeze was troubling companies. They said they are failing to access funding and maintain adequate cash flow levels.

“On the downside, we are experiencing tight liquidity in the market. This liquidity squeeze could weigh on aggregate demand, levels of production and asset values. What it means is that operators may fail to fund their businesses as well as capital needs. If not watched closely, it will have unintended consequences,” Old Mutual Zimbabwe group CEO, Samuel Matsekete said.

“On the upside, the tight monetary stance could result in relative [exchange] rate and inflation stability.”

CABS managing director, Mehluli Mpofu said the liquidity condition was dire.

“Across the market, there is a very tight liquidity squeeze,” Mpofu said, adding, “There has been concerted effort by the RBZ through its contractionary monetary policy to mop up liquidity in the market”.

He said the introduction of the gold coins will take the Zimbabwe dollar out of the market.

The delays or suspension by the government in paying contractors and other suppliers is also reducing liquidity in the market, Mpofu said.

“High interest rates (200%)  will also result in subdued lending, which will also reduce liquidity in the market,” he said.

First Capital Bank managing director, Ciaran McSharry said the tenuous operating environment projects an outlook that does not favour balance sheet expansion for banks.

“With the Zimbabwe dollar liquidity on the market having been largely constrained, the bank has experienced a notable shift in its operating environment with foreign-denominated business becoming increasingly prominent,” McSharry said.

He said the central bank has maintained a tight monetary policy framework to counterbalance expansionary pressures on money supply.

The measures included mopping up of banks’ daily excess liquidity, the banker said.

The Zimbabwe dollar remained under pressure this week as annual inflation continued on an upward trend, accelerating to 285% in the month of August from 257% in July.

To rein in the runaway inflation, the RBZ expanded its monetary measures, tightening money supply and curtailing speculative activities.

The apex bank also increased the market interest rates to 200% from 80%.

Analysts said the move reduced liquidity in the market.

The Zimbabwe dollar also suffered a 400% devaluation against the United States of America’s dollar at the official exchange auction rate closing at ZWL$538: US$1 yesterday from ZWL$108: US$1 in January this year.

“Most companies have no capacity to absorb shocks, meaning there could be more headwinds than tailwinds,” an independent economist, Ishemunyoro Sibanda, told Business Times yesterday.

He said the deteriorating liquidity conditions were severely afflicting industry and commerce.

Firms are facing a funding squeeze.

“There is  a liquidity challenge in the economy  and what the liquidity challenge does is it depresses aggregate demand as there is no traffic in the shops and at the industries,” the Confederation of Zimbabwe Industries president Kurai Matsheza  said.

The squeeze has seen banks cutting back on lending at a time companies are in dire need of funding.

Bankers Association of Zimbabwe CEO Fanwell Mutogo said the decision by the authorities has tightened liquidity in the market such that there is very limited lending activity in the economy.

“Liquidity is very tight and we know why it is like that and what they want to achieve but this has affected agriculture lending.

“Once the liquidity situation improves we will participate strongly as far as lending is concerned. As of now we are participating but not to our potential because of the liquidity constraints,” Mutogo said.

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