On the 9th of May, Zimbabweans woke up to a sweeping raft of measures announced by President Emmerson Mnangagwa aimed at stabilising the economy. Considering the 100% or so depreciation that had happened on the exchange rate during the last two weeks and the subsequent spike in prices of goods, the business atmosphere was already pregnant with expectation of a drastic policy response. And indeed the response did not disappoint.
A nuclear bomb detonated
Among the announced drastic measures has been the immediate suspension of credit and drawdowns on new and existing facilities. This suspension of credit, if implemented as suggested, will have a nuclear-bomb effect on solvency of geared corporates who, without notice, will have to contend with shrinking their working capital base. With the monetary policy having been reluctant for years to hike interest rates in line with inflation to tame speculative borrowing, the policy makers have opted for a total shutdown of credit-induced monetary expansion.
Productive sector loans constitute about 76% of total bank lending, implying therefore that about ZW$190bn of credit has been impacted. The consequences for the geared corporates are huge, considering that for some, making a simple electronic transfer of money will almost be impossible until one extinguishes their overdraft facilities.
Generally, hyperinflation and mismanagement are known to decimate the real value of working capital for businesses. In this current scenario, the twin effect of the current high inflation and this policy-sanctioned amortisation of working capital through a post-no-debit principle for geared corporates will leave a number teetering on the edges of bankruptcy.
Cash flow management has, all of a sudden, been redefined for those in debt, in particular for those running overdraft facilities. For the bankers, banking systems would need to be twitched to prevent overdrawn accounts from making outbound transfers and or payments. This is a directive banks will implement begrudgingly as they know fully well that they will be driving some of their long-standing profitable clients into despair.
Fighting two axis of evil: the ZSE and Parallel Rate
Surviving the haemorrhage for the top 100 or so big borrowers is not going to be an easy road. Naturally, a shadowy and underground lending economy will emerge driven by both greed and sympathy. Funding cash flow requirements will force most of the geared corporates to start disposing marketable securities and foreign currency held in vaults, playing well into the open trap of policy makers. The thinking and aspirations of the policy makers on these moves are easily discernible. The allegations (which, unfortunately are a reality) by policy makers that corporates have been keeping US$ cash in vaults as well as in nostro accounts as savings and electing to use the ever depreciating ZW$ bank loans as working capital are hard to dispute.
And the policymakers are attempting to poke two perceived twin evils emanating from this; the runaway exchange rate and skyrocketing stock exchange. The liquidity crunch that is expected to hit the highly leveraged is expected to induce haemorrhage of USD cash savings and sell-off of shares on the ZSE as companies will scramble to maintain decent working capital levels after credit facilities are cut off.
With that, the policymakers hope to achieve the twin objectives of bursting the stock exchange and at the same time stabilizing the foreign exchange market. The policy expectation is that successive years of domestic monetary expansion bonanza and the resultant asset bubbles and runaway exchange rate will be corrected swiftly to restore confidence and achieve price stability.
Whilst the script is well crafted, with the end game seemingly secured beyond doubt, there are a number of challenges in the proposed measures. Firstly, the fact that there is a window for banks to approach the RBZ for considerations on ‘case by case basis’ to vary these measures for some esteemed and strategic corporates means that sooner or later, the majority of big borrowers will become an exception. (Refer to paragraph 4 of the RBZ 09 May Circular to Banks and MFIs). In pursuance of national and personal interests, both the policy makers and banks will agree to allow a select few but significant borrowers to continue accessing their facilities.
These will, by natural selection, be the big corporates and by extension, the biggest borrowers that produce basic goods and strategic commodities that cannot be allowed, politically, to be asphyxiated by abrupt credit cut-off.
Of the ZW$250bn loans and advances or so that are in the market today, the banks will be more than willing to plead on behalf of their key borrowing clients in order to safeguard their interest income that has suddenly become threatened. And the policymakers wanting to avoid collapsing the economy, will agree on profitable prisoners’ exchange with the banks.
Contributing 40% of the total revenue for the banks, interest income is the single biggest source of income and the banks have a personal interest in pleading on behalf of their biggest borrowers to be exempted from the policy. Given an opportunity, they will gladly exaggerate the relevance of each and every borrower in the economy to justify them being exceptions.
Bad debts a simple book entry. Just that!
The fears of rising non-performing loans for the banking sector are real. The non-performing loans ratio generally reflects management pedigree and astuteness. The ratio currently sits just below 1% and more than anything, reflects the existing high levels of inflation that have made every borrowing a profitable affair.
Whilst this rate is surely expected to spike if the credit suspension policy is maintained, the bankers worry little about this impact as they would gladly re-establish most of the expired facilities once the policy embargo is lifted, correcting the loan portfolio quality with a simple book entry. Just that! Whatever will happen, it will take excessive courage for banks to sue their clients for seemingly non-performing loans induced by this policy shock.
Binoculars zooming from the South
The impact of this policy measure will not only hit the bankers and their ‘wayward’ clients, but unfortunately will cascade to the very playground that politicians intend to insulate from the alleged shenanigans of the corporate elites. The policy makers may not be aware of how this policy, if sustained for a month or longer, can trigger huge disruptions in the goods market, causing shortages that will in fact trigger the very price increases they are attempting to arrest in the first instance.
Without any doubt, and of course paying credit to globalisation, South African manufacturers and other businesses alike, accounting for 47% of our imports (2020), are salivating at the prospect of expanded and new business opportunities to fill the void that will be left by our own manufacturers.
This policy measure, if sustained, will be credited for finishing off a sizeable number of resilient domestic manufacturers and producers of goods and services that have stood the test of time in bubble and burst cycles of the last three decades, making fortunes and losing the same in equal measure.
And lawyers too will join the dancefloor!
For a discerning observer, the suspension of credit facilities will not only hurt the primary borrowers. The intertwined nature of business means that there are as well non-bank creditors and debtors on balance sheets of corporates. The collateral and systemic damage will be much bigger and more disruptive than originally thought as settlement jams will become pronounced and protracted.
And sooner or later, lawyers will start to receive more calls from squeezed creditors wanting to force the hand of the law to compel their debtors to pay up, with auctioneers and business rescue managers dusting their desks once again for busier days ahead.
Seeing a speck in a friend’s eye and missing a log in one’s eye!
Whilst there is an urgent need to contain money supply growth by all means necessary to foster macro-economic stability, doing so by swinging a sharp sword at lightning speed on bank credit may not be the best of options.
Understanding that banks and their customers are not the primary sources of the avalanche of liquidity in the market would allow policy makers to introspect and look at themselves critically with regard to how the central bank and central government balance sheets have ballooned significantly over the last three years.
The stock of money as disaggregated in various items, has grown significantly in just over a year, from around ZW$35bn in June 2020 to about ZW$470bn in Dec 2021. This massive growth in the stock of money supply (even after netting off the FCA component) would justifiably affect the stability of the exchange rate for a small open economy like Zimbabwe.
Whilst the economy’s foreign exchange generating capacity has been superb, with for example diaspora remittances surging 43% to US$1.4 bn in 2021, the growth in domestic money supply has, unfortunately, been running faster at over 300% per annum and to expect the exchange rate to stabilise would be putting excessive faith in redefining economic thought.
Equally, the expectation by policymakers that they can liquefy the markets to over-saturation levels and expect economic agents not to hedge against the resultant erosion of value of the domestic currency would be placing excessive faith in principles of collective market-driven moral restraint.
A change in the auction
The policy announcement touched as well on the Auction Rate. Leaving the price discovery mechanism to the market in the allocation of foreign currency on the auction alone in our small open economy is a contentious policy proposition.
Considering that the domestic US$ denominated revenues have increased significantly for most of those accessing foreign currency from the auction, it would be more prudent to change the current format of the Auction system from being a trading platform to a lending platform.
Those confident in their business models should borrow foreign currency, through their banks, from the Borrowing (not Auction) floor. Allowing the auction to be a borrowing rather than a trading platform will weed out the majority of arbitrageurs and only allow those whose business models are sound with traceable cash flows to access foreign currency.
The majority of arbitrageurs, who are of course important in every economy to help policymakers sharpen their policy instruments always, can then be left to approach the market on a willing-buyer willing-seller framework and suit the desires of their souls.
Whilst the willing buyer-willing-seller approach is generally deemed efficient as an allocative framework, it responds swiftly to changes in money supply. It becomes imperative for the policymakers to understand that as long as they pump new stock of money, the exchange rate would never stabilise.
A road to inflation
When all has been said and done, there is growing consensus in the market that the big contractors implementing the big infrastructure projects have been behind the recent spike in the exchange rate, an allegation the policymakers have not bothered to respond to or clarify.
For policymakers that are known to formally respond vociferously to even faceless social media characters, the decision to leave this allegation to lie without response has even be more suspicious. But again, a mortgage for a house with just four corners needs 15 years or so to pay off in a normal economy.
The ongoing infrastructure projects, long overdue and having been neglected for over 30 years or so, are a breath of fresh air. However, they, just like buying a house, require long-term funding and should be carefully spread out to minimise disruptions in the domestic monetary form. As it has been, the road projects have become good roads to inflation!
Criss-crossing the streets, meeting and attempting to engage one another, policymakers and business leaders have had a busy few days since the announcement. Whilst the business community has been blaming policymakers for not consulting, the policymakers have opened the bazooka, blaming business for being willing agents of chaos serving to toe a regime change narrative from their ‘foreign’ handlers ahead of elections next year. That animosity and suspicion comes from many years ago and doesn’t seem to be going away.
After a round of meetings with cups of tea and increasing sounds of laughter, the policymaker will declare victory and a ceasefire. Sooner or later, a truce will emerge, but of course not without casualties from the business side. But again, that is the cost of not learning from our previous mistakes.
Brains Muchemwa is an economist. This article was first published on his blog: Investing in Africa