The Sunday News
WITH Zimbabwe experiencing liquidity challenges, most people and economic agents were pinning hopes on the tobacco marketing season to boost money supply into the economy.
But general cash-flow has not improved as expected.
That does not mean, however, that tobacco revenues are not flowing into the economy. It’s just that little effort has gone into analysing the transmission mechanism of tobacco revenues, and how it contributes to improved liquidity in the financial system.
Zimbabwe’s tobacco selling season typically begins in February and official figures show that total banking deposits that month stood at $4 billion, having increased by $133 million during that month alone.
By any standard, this is a huge increase which in part can be attributed to the tobacco inflows. So it is commendable that the deposits are beginning to respond positively though there is a time lag. The rise was significant if one compares it to the annualised growth rate.
Reserve Bank of Zimbabwe figures showed that broad money registered a modest 5,46 percent annual
growth in February 2014, compared to 12,91 percent over the same period last year. This reflected an increase of US$208,96 million in broad money, from US$3 813,62 million in February 2013, to US$4 021,78 million in February 2014.
BancABC group economist Mr James Wadi told BH24 that what the country was undergoing presently was what he termed the “first round impact” in which the banking sector was the first beneficiary of the tobacco sales.
“Normally banks that have tobacco merchants/contractors as their customers will directly benefit from the offshore inflows (first round impact) for the purchase of tobacco.
”Under the current exchange control regulations (Tobacco Finance Order), tobacco merchants/ contractors must borrow offshore for the purpose of financing their green leaf purchases. This represents direct fresh injection of new money into the banking system,” says Mr Wadi.
Tobacco remains a critical source of revenue for Zimbabwe due to its agriculture-economy status and its huge dependency on exports.
But since the main sources of liquidity in the country under the multi-currency system are exports and Diaspora remittances, given that external lines of credit are clogged and the Reserve Bank of Zimbabwe cannot inject liquidity into the economy, it is unrealistic to expect the sector to be the panacea to the country’s economic challenges.
But it should be expected that the tobacco selling season will have some significant impact in the long run, or what Mr Wadi calls the “second round impact”.
“It is also worth noting that whenever the money related to tobacco sales is paid out to farmers, this represents a withdrawal of cash in the banking system in order to en cash tobacco farmers who prefer to be paid in hard cash.
“Once the farmer is paid, this increases the local demand and buying power. As and when the farmers use their money (to buy agricultural inputs for next season, pay school fees, buy durables including farm implements etc) we believe that the money will eventually find its way back into the formal banking system (second round impact) because the beneficiary shops are clients for various banks,” says Mr Wadi.
According to this analysis then, basing on the tobacco sales, improvement in Zimbabwe’s liquidity situation will likely be felt more in the third quarter when farmers up their preparations for the upcoming cropping season. — BH24
