THE year 2024 has been dominated by a single, overarching theme: the devastating impact of liquidity shortages.

In the first quarter, Zimbabwe’s average monthly money supply growth surged to 46,39%, while the Zimbabwe dollar (Zimdollar) depreciated by a staggering 53,69% month-on-month.

By the end of March, the Zimdollar had plummeted to US$1:ZW$22 055,47, down from US$1:ZW$6 104,72 at the end of 2023.

Meanwhile, the economy grew at a sluggish monthly average of 0,16%, with gross domestic product (GDP) projected to grow by 2% for the year.

This disconnect between money supply growth and economic activity led the Reserve Bank of Zimbabwe (RBZ) to abandon the Zimdollar in April, introducing the Zimbabwe Gold (ZiG) in its place.

To support ZiG, the RBZ and Treasury implemented policies to limit money supply growth. Consequently, the average monthly money supply growth between April and September fell to 23,95%.

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However, this reduction led to a liquidity crunch, with the market experiencing a 22,44% decline in liquidity.

Economist Gift Mugano noted that exchange rates could remain high, which would likely keep money supply growth elevated, albeit stable.

This suggests economic growth would continue to face significant challenges in the short term.

“Yes, you want to reduce liquidity, but you must never put a country under national fasting in the spirit of trying to reduce liquidity,” Mugano said at the Zimbabwe Independent’s Banks and Banking Survey ceremony last week.

“Like we hear, exporters are not getting export retention. I talk to them; I stay with the people; I stay with the companies; they tell me they are not getting their 25% retention,” Mugano said.

“Of course, there is an arrangement that banks should then be able to pay that, but there is not enough liquidity in the market for them to do that. So, it is causing risks of default and viability challenges in the market.”

He queried why there was a focus on stabilising ZiG through limiting money supply instead of keeping liquidity growth stable.

“So, why are we draining the market to a point where we are killing it so much?”

Essentially, the economy is being starved of liquidity owing to the fall of money supply.

However, this fall has reduced the money supply to such low levels that businesses are failing to access capital to expand, and consumers are struggling to meet their immediate and short-term financial obligations.

Consumers use liquidity for expenses, such as food, rent, utilities, transportation, and healthcare.

The Consumer Council of Zimbabwe has confirmed consumers are struggling to access loans.

Regarding business, the Confederation of Zimbabwe Industries, in its 2024 Half Year Business Insights Report released in September, revealed that only 22% of manufacturers undertook new investments owing to liquidity challenges.

Bankers Association of Zimbabwe chief executive officer Fanwell Mutogo said interbank trading was low owing to liquidity challenges.

“Interbank trading is currently low among local banks. External financing is available but not adequate, and the tenors are less favourable than desired,” Mutogo said.

“While deposits are increasing, they are mostly transitory in nature, which poses a challenge for the sector,” he said.

“Yes, the government is making efforts within its means to honour its debt securities, including bonds and Treasury Bills, upon maturity. In instances where challenges arise, we are always engaged to find an amicable solution.”

He said banks primarily relied on their balance sheets, overdrafts, external lines of credit (though inadequate) and support from the RBZ.

“Banks, as part of their traditional mandate, strive to carry out their intermediary role despite liquidity pressures,” he said.

“According to the Reserve Bank of Zimbabwe, the loan-to-deposit ratio was around 52,51% as of June 2024. This indicates that banks are actively lending, which is essential for supporting economic activities and growth.”

Mutogo said despite the tight liquidity stance being pursued by monetary authorities, banks had managed to meet their short-term obligations.

“This deliberate policy move by the monetary authority aims to control inflation and ensure economic stability.

“The tight monetary stance is a measure of control and avoids excess liquidity in the market. The belief is that the available liquidity is adequate to run the economy while maintaining stability, which is the thrust of the policy stance.”

The value and stability of a country’s currency are directly impacted by its liquidity.

Too much liquidity not backed by economic activity or foreign currency reserves causes inflation, as has been the case in Zimbabwe.

On the other hand, a lack of liquidity can hinder economic expansion as it creates a monetary crunch, one where businesses and consumers struggle to access sufficient cash for transactions.

This reduction can slow economic activity as spending and investment decline, potentially leading to a contraction in GDP.

Businesses then face difficulties in meeting payroll obligations or purchasing inventory and consumers might delay purchases due to the restricted access to credit or cash.

Additionally, reduced money supply can drive deflation, where prices fall due to lower demand, which might sound beneficial, but can discourage spending further as people anticipate even lower prices.

This deflationary spiral can lead to economic stagnation, rising unemployment and financial instability, particularly if the reduction in money supply is abrupt or poorly managed.