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Abel Sanderson Business Correspondent
THE notion of liquidity in economic literature relates to the ability of an economic agent to exchange his or her existing wealth for goods and services or for other assets.
In this definition, two issues should be noted.

First, liquidity can be understood in terms of flows (as opposed to stocks), in other words, it is a flow concept.
Therefore, liquidity refers to the unhindered flows among the agents of the financial system, with a particular focus on the flows among the central bank, commercial banks and markets.

Secondly, liquidity refers to the “ability” of realising these flows.
Inability of doing so would render the financial entity illiquid and lead to the phenomenon of liquidity crisis.

It is important to understand that the concept of liquidity is multi-faceted.
It should be understood from various viewpoints, but an understanding that these concepts are interrelated is crucial.

The discussion in this article centres on two of these which have received lots of prominence in discussions around economic challenges facing the country.

Funding liquidity is simply defined as the ease with which economic agents can obtain external finance.
Alternatively it can be defined as the ability of an economic agent to meet cash obligations when they fall due.

The second one is bank liquidity which can be defined as the ability of a bank to meet its immediate obligations as they fall due. This refers to the ability of the bank to honour its obligations towards its clients as and when they fall due.

Other than domestic deposit mobilisation, which, to a large extent, is currently limited, the major source of liquidity includes the export earnings; diaspora remittances; offshore credit lines; foreign direct investment inflows and portfolio investment inflows.

The performance of these sources has been below expectations since the 1990’s and has worsened since the adoption of the multi-currency system.

Liquidity crisis is a situation where cash resources are in short supply and demand is high.
During a liquidity crunch, businesses and consumers are charged high interest rates on loans which are more difficult to obtain.

Since the adoption of the multi-currency system in the country, this scenario has been haunting the economy leading to various problems.
One of these is the limited ability by the banks to perform financial intermediation hence depriving various sectors of the economy life lines for their operations.

The challenge of illiquidity has much to do with the inability of economic agents to finance certain level of economic activity and the vicious cycle that follows.

On a broad macro-economic perspective, the liquidity problem has seen economic agents failing to honour their obligations towards local authorities, suppliers of goods and services, statutory obligations (e.g. Nassa, Zimra etc.) repayment of loans and other critical payment flows.

This has led to a situation where the economy has failed to reinvigorate itself and start moving forward.
It is hence not surprising that the Government is underpinning the success of its new Economic blue print, Zim Asset on the improvement of liquidity in the economy.

Under the section on overall Assumptions of the Zim Asset Plan, the first assumption is “Improved liquidity and access to credit by key sectors of the economy such as agriculture”.

The main issue that needs to be debated is how can we improve the liquidity in the economy? What models have been used elsewhere to resolve the liquidity problem?

Potential solutions to the liquidity crunch
At the moment, the most important aspect of improving liquidity is to improve the confidence in the banking sector and the economy at large.

Improved confidence is usually accompanied by increased investment inflows which in turn support key productive and export sectors.

Improving confidence in the banking sector requires the following:

•  Capitalisation of the central bank: This would allow the central bank to play all requisite functions unhindered.

• The effective and efficient exploitation of the country’s resources to set the Government on pedestal for robust economic growth and development.

•  Continuous re-engagement with the international community and pursuit of the IMF Staff Monitored Programme (though the benefits to liquidity will be long-term)

•  Review of country’s (Government, banks and others) support to corporates with those outside the radar of being competitive being left to die and resources forwarded to those deemed competitive.

•  Adopt measures to protect the country from abuse by regional countries, being dollarised, we have become cheap source of hard currency for citizens of other countries in the region.

•  Improving the overall investment environment is critical for FDI hence the need for clarity around the indigenisation laws

•  Understanding the global dynamics and determine where money is and follow it. This would require corporation among various economic agents (Government, industry and the financial institutions) as they approach potential funders.

•  Financial inclusion and financial literacy programmes should be rolled out in the country so that we tap in the resources currently circulating outside the banking system.

•  Building confidence among the county’s citizens so that they resort to doing their transactions through the official banking system.

Through these suggested strategies, we hope to come out of the liquidity challenges that have pervaded the economy since adoption of the multi-currency system in 2009.

•  Sanderson Abel is an economist. He writes in his capacity as senior economist for the Bankers Association of Zimbabwe. He can be contacted on [email protected] or on 04-744686, 0772463008