The Sunday Mail
Ill-advisably, our Government has taken to offer an endless rope of debt to the private sector, in some cases fostering a sense of entitlement to debt.
Important to any enterprise is its financing strategy.
In an allowing environment, your typical business would have the option between equity and debt capital.
However, in our currently restricted economy, the overwhelming majority of our companies today can only look to attaining debt financing.
Increasingly, debt seems the only means available for companies to raise capital. Therein lies our conundrum.
Debt is more suited for economic booms than it is for economic slumps.
Counterparties have to possess a certain level of certainty of good business in the foreseeable future. Management would take on debt when there is a realistic prospect of generating cashflows to exceed principal and interest; with the hopes of still generating revenues to retain for expansion.
How many enterprises today can be so optimistic in our economy?
On the other hand, how many creditors can loan with realistic expectations of recouping principal and earning interest income, let alone at our considerably high interest rates?
Ours seems to be an unfitting environment for debt.
Conservative management would place greater emphasis on equity at the moment.
Long equity investors find trust in sustainable business models, market positioning, and core competencies of an enterprise.
They would have less pressure on immediate cashflows.
Equity provides some level of financing to withstand a slow economy for a business not to completely shut down.
An investor can inject capital today, and then patiently speculate a brighter future in the long-term.
Were this option available, I trust that many of our proficient management would go this route. Now, take heed that up to this point, this is all very subjective on my part.
However, what seems factual and pretty objective is that our policy-makers are adamant to spur the economy on debt.
Already, our high national debt has cast a pall over fiscal policy and Government spending. It has shattered external confidence in our Government’s solvency.
One would expect reservations towards debt. But unfortunately, policy-makers remain keen on stimulating the economy by stuffing more debt into the economy. Not to blame Government alone, the private sector has developed an affinity to debt. I suppose that’s understandable.
Presented with the option between going out of business and borrowing, taking debt is the obvious choice.
Ill-advisably, our Government has taken to offer an endless rope of debt to the private sector, in some cases fostering a sense of entitlement to debt.
For instance, even though 48 companies accessed the Distressed and Marginalised Areas Fund, Industry and Commerce Minister Mike Bimha still found it justified to complain that the fund was too stringent.
He had a problem with the fact that the fund required audited accounts for the past five years and collateral.
His stance being that ailing companies must not be asked to prove that they will repay the loans when they are already “dead”. The minister must understand that “dead” enterprise is not creditworthy.
Otherwise it becomes dead weight on the economy.
It was ironic that in his Monetary Policy Statement, Reserve Bank of Zimbabwe Governor Dr John Mangudya said one of the main causes of our present economic circumstance is that businesses used short-term funding to acquire long-term assets from 2009 to 2012.
He termed this as “funding mismatches”.
Yet, he was applauded for the increase in bank loans from US$3,7 billion to US$3, 8 billion.
It makes sense for the banking sector to applaud him because after all, their business model is to make money off interest on loans.
However, for a macro conscious policy-maker, perhaps the remedy should be to allow these overly expanded businesses to scale down, not to give them more loans. That would also mean that the option of companies losing their assets put up as collateral should be considered.
Likewise, the initiation of Zimbabwe Asset Management Corporation to acquire toxic non-performing loans was very premature. There are no signs in the economy to hint that those defaults will be retrievable in the near future.
There’s a difference between increasing the economy’s money supply, which this move intended to do, and inflating the economy’s debt.
We did the latter.
So, how do we reduce debt in our economy?
First, we should be more stringent on credit conditions and limit debt availability. Second, allow businesses to fail. Overly leveraged and insolvent enterprises should be allowed to close down; even companies that were maybe once industrial heavyweights.
In fact, that would clear out the debt existing in ecosystems that such enterprises dominated.
We must allow the economy to scale down to a realistic capacity.
This will scale us to the true size of the economy in terms of sustainable capitalisation and consumer market demand.
I do have sentiments towards social effects of companies closing down. But such concerns are exaggerated.
Companies are retrenching anyway, some holding onto employees for months without payment.
If companies are allowed to fail, I trust in the ascent of our small and medium enterprises (SMEs). They are operating at sustainable capitalisation with less debt and are operating to scale.
They will pick up the existing activity in respective sectors with new fresh business models and ideas. When the economy picks up, they will expand in a corresponding manner.
This presentation may probably prove to be generally unpopular.
It is very difficult to persuade micro-focused stakeholders on the negative macro-economic effects of piling up debt in the economy, when that practice seems to be their only immediate salvation.
Now, I do concede that all this market behaviour is largely also due to the extreme lack of equity investors in the country. Many locals do not have the income to invest in equity. Hence, our industry is very dependent on the implementation of indigenisation laws holding up investment.
We need equity! Without it, there’s only debt.
Even the Zimbabwe Stock Exchange is now looking to establish an alternative market to list and trade in debt securities. We are putting ourselves in a deeper hole with debt in the economy. It is unsustainable and a hindrance to economic growth.
According to the book of Leviticus, in the land of Israel there was the law of Jubilee.
The law of Jubilee stipulated that all debts be automatically cancelled after every seven times seventh year of the Sabbath. From my understanding of the scripture, that would be after every 49 years.
Prophet Magaya said that Zimbabwe would be the next economic powerhouse.
It is my sincere hope that he was not looking half-a-century into the future.
