Causes of Liquidity Crisis in Zimbabwe after the Adoption of the Multicurrency in 2009

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue X, October 2019 | ISSN 2454–6186

Causes of Liquidity Crisis in Zimbabwe after the Adoption of the Multicurrency in 2009

Fainos Chinjova¹, Reuben Zinhumwe²

¹Graduate School of Business, National University of Science and Technology, P.O Box AC 939, Ascot, Bulawayo, Zimbabwe
²12 Cambridge Drive, Greendale North, Harare, Zimbabwe

Abstract:-The study examined the real causes of the liquidity crisis in the banking sector since the introduction of the multicurrency in Zimbabwe. The liquidity crisis continued to harm string the Zimbabwean economy despite the growth in the aggregate money supply (M3) from US$300 million in 2009, following the adoption of the use of multicurrency. During the period under review, the economy registered a peak of 11.9% growth in 2011. However, despite high economic growth rates, banks still failed to supply cheap loans to the productive sectors, a significant indicator of the liquidity crisis. This was worsened by the shortage of cash in 2016. The investigation on the real causes of liquidity crisis adopted a qualitative research method. Data was collected using in-depth interviews. The research concluded that liquidity crisis in Zimbabwe was caused by poor performance of the external sector, mainly the net exports, foreign direct investment, portfolio investment, diaspora remittances as well as foreign borrowing. Failure by the Reserve Bank of Zimbabwe to provide the lender of last resort function, the growing informal sector were also considered to have had a negative impact on the liquidityin the country. To improve the liquidity in the country, the study recommended that the government revert back to the principle of cash budgeting and that there should be an increase in production of local products which should be exported.

Key Words: Liquidity Crisis; Multi-Currency Regime; Cash Crisis

I. INTRODUCTION

Zimbabwe is facing an acute shortage of cash, which has been characterized by long queues in every bank. Financial institutions have not been able to avail cheap long term loans to the productive sectors, suggesting that the country is facing a liquidity crisis. According to Chagwiza (2014), the Reserve Bank of Zimbabwe re-emphasized the need for liquidity, after the 2003 to 2004 liquidity crisis. Therefore, liquidity became very important for the functioning of financial markets and the banking sector. Mkhitaryan (2014) indicated that economic development and growth depends to a large extent on a well-functioning, stable and sound managed banking sector.

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