They say necessity is the mother of all invention and as history shows, this mantra has been the reason behind some of mankind’s most innovative solutions and inventions.
in the money with NESBERT RUWO & JOTHAM MAKARUDZE
Confronted by liquidity and cash flow challenges, the Zimbabwe parliament came up with the novel idea a few weeks ago to have livestock (a component of biological assets) allowed as collateral for bank loans. Now, while this might seem like a strange concept, it is not in and of itself completely flawed. Countries such as Ghana, Kenya, Malawi and Nigeria already allow livestock to be used as collateral and it has been shown to be a fantastic way for banks to tap into the section of society normally excluded from the finance sector by exorbitant banking fees and a lack of financial savviness. While theoretically it is not such a bad idea, the banks have raised concern over the vulnerability of livestock to rapid depreciation, particularly when tampered by issues such as drought and disease. The accounting profession has an accounting standard on how to deal with these biological assets.
Some have criticised the idea as one of desperation as US dollars have been slowly vanishing from sight and the average man on the street has begun to really feel the credit crunch. The government has also resorted to solve its cash shortages by printing treasury bills. The push towards the use of plastic cash, which has long been promoted, also comes with its own challenges within an economy such as Zimbabwe’s in which a considerable proportion of economic activity has regressed towards the informal sector. The demise of the formal sector in Zimbabwe is evident from the decline in personal credit extension provided by the banks over recent years. According to World Bank data on financial inclusion, only 4% of Zimbabweans took personal loans from banks since 2014. The data also shows that over the past three years bank lending to businesses has stagnated at about $3.6 billion. Overall, private sector lending as a share of domestic credit has fallen from 90% to less than two-thirds over the same period. While this may serve as an indicator of a lack of demand for credit from struggling businesses, there is a circular reference in which lack of credit is also stifling the growth of the economy as businesses are not able to borrow money for investment in raising production. Given the currency shortages, uncertain political environment and hence economic environment, banks remain increasingly cautious when granting credit.
While dollarisation has greatly transformed the economy and set it on a new trajectory, it has also left the central bank without any direct control over money supply. The introduction of bond coins and subsequently bond notes has come as a relief, albeit accepted with great reluctance. About $110 million of the surrogate currency is said to be in circulation. The central bank has been unable to stem private hoarding of US dollars or externalisation of currency despite imposing some measures that limit individuals to a $50 cash withdrawal limit, $20 cash, back at points of sale and $1 000 cash when travelling out of the country. Businesses are also being compelled to bank any cash in excess of their working capital requirements. Public perceptions of a hopeless central bank have surfaced as the cash shortage has obliged government to propose and approve various punts to conjure credit out of thin air. Moreover, government efforts to unlock fresh lending through repairing relationship with multilateral bodies by clearing $1.8 billion in arrears have not yet yielded much. Although it is something the central bank will deny at this point, it is all-consumed with looking for ways to transition back to a local currency without causing a collapse of an already fragile economy.
Several memes and jokes have been circulating in recent weeks mocking the notion of using goats as a form of payment for school fees. Reading the news from the diaspora without adequate context, one would be quite perplexed as to how this could be so in the 21st century. So, while the idea of livestock as collateral for loan may be a plausible one and one that might even be considered innovative, it is hard to imagine the use of livestock as a currency. Firstly, goats are far from fungible, making it extremely difficult for the value of a goat to be determined with the level of accuracy required to make transacting fair and transparent. Furthermore, goats are not divisible units and would not be universally accepted. As such, despite the population’s necessity to transact within a virtually cash-less economy, a barter system simply cannot work in a modern economy and the government should consider other options of facilitating transactions. As the saying goes, desperate times, call for desperate measures; the idea of goats as a form of a currency is one that shows the level of desperation that Zimbabwe has reached in its search for a solution to the cash crisis. Only time will tell what other potentially innovative ideas the future holds. What we see though is that if there is a need to turn these goats into “cash-cows”, the implementation of a more formalised and long-awaited commodities exchange could create a platform for livestock owners to trade their livestock in a more controlled and less opaque environment. A structured and organised commodities market could spur growth in that sector.
Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on [email protected]
